Fundamental Analysis: useless in 2020



Given the indecipherable fluctuations of the economy during this year, the title of this post reflects one of my feelings about this unusual 2020 stock market. A Q1 quarter where the SP500 falls 20% and the next Q2 turns around and rises the same 20% is surely something we will not experience again in our lives. Thus, it's complicated to make a serious analysis in an index ETF as usual, that is to say, reviewing both fundamentals and technicals details, alike.

Powell and the Fed with its zero i-rate (good decision) and unlimited QE (excessive) are artificially propping up the financial markets, literally destroying the risk in markets, instead of investing for growth, just for trying to hide the US (and global) recession, already foreseen since January and accentuated by the coronavirus. Now we have market indicators at dangerous edges, like the SKEW index (that measures the risk of a black swan, a 20%+ plunge of markets) spiking now above its March levels. Or the Nasdaq Put/Call ratio (40% of this index are the FAANGs!) telling us that the market is extremely greedy, wrapped in an impressive bubble. Its excessive valuations and overbought, matter little.




Today, the fundamentals do not matter: growth, value, P/E ratio, EPS, dividends, ROE, profit margins, all those key data seems distorted this year due to the COVID and the Fed management of the crisis. Institutional investors, hedge funds continue outside the stock market, mainly in cash and bonds since March, nobody dares to put together long portfolios.

Regardless of the news and sentiment trading, which always moves the market, I am refining my analyzes, granting more (all!) influence to the technical analysis, which seems is working these months more accurately than usual. Forgetting for now fundamental analysis. Price action, support and resistance levels, pattern and candlestick prices, Fibonacci levels, all are very accurate in this 2020 market, always for the short-term in swing or day trades.






So let's just focus on the Technical Analysis


And for a long time, it will be like this in this blog: more much technical analysis (less indicators, mainly price action) in the short term, using a strategy based on breakouts, considering ideas from previous posts.  Remember the breakout definition: a potential trading opportunity that occurs when an asset's price moves above a defined resistance level or moves below a defined support level on increasing volume.

- Use a triple screen (thanks, Mr. Elder) with timeframes daily, 1 hour, and 10-minutes. Because I don't trade futures, I leave aside the popular 4-hour timeframe that these traders use. The 1-hour timeframe works fine for me for stocks and ETFs.

- Define the "big" trend in the daily and a "tradeable" trend (that can differ) in the 1-hour timeframe, drawing main levels, trendlines, and patterns in both of them. Verify there if price action applies for a trend strategy through a price reaction formed after the trendline break. Or otherwise, check if price action applies for a reversal strategy through a price pattern formed before the trendline break.

- Decide the trade in the 10-minute timeframe using price action analysis at your predefined levels, using a confirmation candlestick pattern to avoid false breakouts. And always verifying increasing volume.

Lets review what happened last week with the SPY, through its 1-hour chart, below.


Last two weeks the SP500 had a very predictable behavior in its price action: the holy grail of any swing trader. As the big trend in the daily chart (not shown) is bullish, we use this 1-hour timeframe for more details: analyze the continuation of that bias or unlike, a short-term pullback. After Monday explosion, the SPY price began losing momentum and showing candle rejections in midday Tuesday session, especially when touches the Fibonacci level $313.22, the green line. A breakout opportunity could appear there, or not... be patient.

It happens on Wednesday: a double-top pattern was formed (grey box), so we need to wait for a breakout of the immediate trendline we draw (yellow line). When price broke it, a big momentum candle appeared, with increasing volume: that's the confirmation of a reversal. Go ahead the 10-min chart (not shown) to decide the correct place for entry your short trade. Place your stop loss in the double-top level and trail it for lock profits. Wait until price approaches the most recent swing-low level (near $310, the yellow upper-narrow) to decide if exit the trade.

The exact behavior was repeated in the SPY three more times with the same moves (!): rising to a level forming a double-top, an immediate trendline break (also breaking the black-line EMA50, which reinforces the signal), and a big momentum candle confirmation with increased volume. Surely, more great swing trades opportunities are coming with the double-top and double-bottom patterns. That's why I told that technical analysis seems more accurate than usual. Just follow your strategy as I do with mine.