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The week we all learned about ‘meme stocks’

January 31, 2021

Last week: The dominant market activity last week surrounded meme stocks, those where interest and price action is driven more by social rather than fundamental forces. The market disruption caused by this social media drived assault on select stocks unnerved investors and resulted in bearish weekly candles for the US stock index majors of the S&P500, DJIA, NASDAQ and Russel-2000 and a large bullish weekly candle for the VIX fear index. It is noteworthy that these market jitters did not trigger any Flight to Safety movement into Gold or Bonds; both closing with bearish weekly candles. Flows into the US$ and JPY were relatively modest too and, whilst bullish runs on the likes of EUR/USD, AUD/USD, AUD/JPY and NZD/USD have stalled, they’re all shaping up in potential Bull Flags suggesting traders should, at the very least, keep an open mind. Traders also need to watch to see if the risk-off sentiment that plagued stocks last week persists and, if so, then whether this flows over into other segments of the markets.

 

Technical Analysis: As noted over recent months, it is important to keep in mind that this analysis is Technical and chart-based but that any major Fundamental news items, as recently seen with Coronavirus, have the potential to quickly undermine identified chart patterns. This is why it is critical that traders appropriately manage their trade exposure and risk per trade during these volatile market conditions.

 

Trend line breakouts summary: Articles published during the week can be found here, here and here:

 

  • S&P500: a TL b/o for 110 points.
  • ASX-200: a TL b/o for 200 points:

 

  • GBP/JPY: a TL b/o above the weekly 200 EMA for 170 pips:

 

  • USD/JPY: a TL b/o above 104 for 90 pips:

 

 

This Week: (click on images to enlarge):

    • DXY: US$ Index: The US$ index closed with a bullish-coloured Spinning Top weekly candle, reflecting indecision, and still under the upper trend line of the bearish-reversal descending wedge.

 

DXY weekly: watch for any Descending Wedge mean-reversion activity:

 

 

    • TC’s guide to build your own trading system: I prepared this article over the last two weeks and have tweaked it a few times. This may be of some use to new and /or struggling traders and can be found through the following link.

 

    • Indecision-style weekly candles: indecision-style weekly candles were printed on some instruments again last week: Gold, TLT, AUD/USD, AUD/JPY, NZD/USD and GBP/USD.

 

    • Currency Strength indicator (daily): note the bunching with the currencies so watch for any new breakout:

 

    • Central Banks updates: there are two Central Bank rate update this week: RBA (AUD) and BoE (GBP).

 

    • % Stocks above their 200 Day Moving Average Index: I have been warning for some weeks now to watch for any pause or pullback with US stocks based on the profile with this Index. Not knowing what might trigger such a move but, only, that one looked due. Will the current meme stock situation prove to be the trigger? No one can know for sure but this Index reflects that caution, at the very least, is required. The percentage of stocks above their 200 Day Moving Average remains above the 85% region. The first chart below gives a perspective of this current level and shows how there often tends to be some mean-reversion once such lofty levels are reached. The second, expanded, chart shows that this rally might be running out of puff.

 

% of US Stocks above the 200 Day Moving Average: 

 

% of US Stocks above the 200 Day Moving Average (expanded): starting to turn?:

 

    • S&P500: Keep the bigger picture in perspective with the recent moves:

S&P500 yearly: keep this latest move in perspective:

 

 

    • Market Phases: It is important to recall the three main types of market phases: Accumulation, Participation (Up and Down) and Distribution. Traders should monitor the chart of the S&P500 chart for any Distribution type activity that might eventually lead to Participation Down; especially as the S&P500 trades up near an all-time High. The chart below shows how the S&P500 evolved in the years leading up to, and during, the Global Financial Crisis (GFC). Note how the Distribution phase evolved over a period of many months and there was a double test of the all-time High region. Keep this in mind with the current market action on the S&P500.

 

S&P500 market phases: Global Financial Crisis 2007-2009:

 

 

S&P500: keep watch for any Distribution type of activity:

 

 

    • Copper: Copper is often viewed as one metric of economic health and closed with a bearish weekly candle and still below the weekly 61.8% Fibonacci.

 

Copper weekly: still below the 61.8% Fib:

 

 

    • Emerging Markets: The Emerging market ETF, EEM, closed with a bearish-Engulfing weekly candle after testing the previous all time High, near 56.

EEM weekly: watch the support trend line:

 

    • DJIA: The DJIA closed with a bearish, almost Engulfing, weekly candle and back below the 30,000 level. The monthly candle was ugly too and has a bit of a bearish-reversal Shooting Star look to it. Watch for any break of the 11-month support trend line:

 

DJIA weekly: back under 30,000:

 

DJIA monthly: a bearish-reversal style candle:

 

    • NASDAQ composite: The NASDAQ Composite Index closed with a bearish weekly candle but is holding above the 13,000 level for the time being. The monthly candle was small and green and with long upper and lower shadows.

 

NASDAQ weekly: holding above 13,000:

 

 

    • DAX weekly: The DAX closed with a bearish weekly candle and back below the 13,850 level. Note the bearish-reversal Shooting Star style monthly candle though; a rather ugly monthly candle:

 

DAX weekly: back below 13,850:

 

DAX monthly: a rather ugly reversal monthly candle:

 

 

    • Commodities: The Commodity ETF, DBC, continues with a bullish breakout from the bullish-reversal Descending Wedge that I had been monitoring for some months and closed with a small, bullish weekly candle. The ADX has broken above the threshold 20 level AND price action is still above the $15 resistance-turned-support level:

 

DBC weekly: a descending wedge b/o continues:

 

 

    • Russell-2000: The Russell-2000 is often viewed as the ‘Canary in the Coal Mine’ for US stocks and the index closed with a bearish, almost Engulfing, weekly candle after testing the 61.8% Fibonacci extension of the Covid-induced Swing Low. The monthly candle closed as a bullish-coloured Spinning Top:

 

RUT weekly: note the test of the 61.8% Fibonacci extension:

RUT monthly: watch for any push to the 100% fib extension:

 

 

    • Bonds / TLT: The Bond ETF, TLT, closed with a bearish-coloured Spinning Top weekly candle and still below the recently broken support trend line. The Elliott Wave indicator is still suggesting an uptrend from here though:

 

TLT weekly: 

 

 

    • USD/CAD and USD/CNY: keep an eye on these two weekly chart Descending Wedge patterns for any new trend line breakout.

 

USD/CAD weekly:

 

USD/CNY weekly:

 

 

    • VIX: the Fear index closed with a large bullish weekly candle and above the 30 threshold:

 

VIX weekly: Watch for any push to the 61.8% Fibonacci region, near 60:

 

 

Calendar: Courtesy of Forex Factory:

 

 

Earnings: Courtesy of Earnings Whispers: another big week for Earnings:

 

 

Market Analysis:

 

S&P500: The S&P500 closed with a bearish Engulfing weekly candle and a bearish-reversal Shooting Star-style monthly candle putting a pause to the 11-month rally that has been in play since the bounce off the Covid-induced March 2020 Lows.

Of note is that the index has broken below a 13-week support trend line (see 4hr chart) although last week’s price action shaped up into a wedge and this has given the 4hr chart a bit of a Bull Flag appearance so traders need to keep an open mind.

The other point to note is that the 11-month support trend line from the March 2020 Lows remains intact for the time being but will, no doubt, be in focus in coming sessions. This support trend line is shown on the 4hr, daily and weekly charts below BUT note on the first weekly chart how the 61.8% Fibonacci retracement is down near previous S/R around the 2,800 level. This would be the main, and longer-term, target IF any sell-off develops.

Trading volume picked up last week and note the breakout, albeit subtle, above the trend line and the 200 MA. Keep watch for any further Volume increase.

 

S&P500 ETF: SPY weekly: Volume has broken above the TL & 200 MA:

 

The index closed the week just above 3,700 making this the level to watch for any new make or break and there are revised 4hr chart Flag trend lines to monitor for any new breakout.

NB: The second weekly chart shows how the 61.8% Fibonacci extension of the Covid-induced Swing Low is up near 4,150. This would be one target for any bullish continuation move.

Bullish targets: any bullish 4hr chart Flag breakout would bring 3,750, 3,800 and 3,850 into focus.

Bearish targets: any bearish 4hr chart Flag breakout below 3,700 would bring the 11-month support trend line into focus followed by whole-number levels on the way down to 3,500 as this still lies near the 4hr chart’s 61.8% Fibonacci. The longer-term target for any sell-off would be the weekly chart’s 61.8% Fibonacci retracement level, down near 2,800.

  • Watch 3,700 and for any 4hr chart Flag breakout:

 

 

ASX-200: XJO: The ASX-200 closed with a bearish Engulfing weekly candle and a small, bullish-coloured monthly candle having a long upper shadow reflecting that sellers forced price down from the Highs.

The Index closed just above 6,600 making this the level to watch in coming sessions for any new make or break; although the 4hr chart reflects further weakness in Friday’s overnight US trading.

As mentioned over recent weeks: The GFC High of 6,851.50, pre-2020 High of 6,893.7 and 2020 High of 7,197.2 loom large and ahead of current price action and are the resistance levels ahead for the index.

Trading volume remains subdued but watch for any new breakout:

 

XJO weekly: watch for any new TL b/o:

 

Keep in mind that the recent Golden Cross still remains valid BUT price has dipped below the 50 SMA. The Golden Cross is a bullish signal where the 50 SMA crosses above the 200 SMA. Such crosses are often, but not always, followed by a decent bullish run so these crosses are worth noting:

 

XJO daily: the recent Golden Cross remains valid for the time being:

 

The weekly close was near 6,600 but the overnight trading low, near 6,550, will be the level to monitor for any new make or break. Note how ADX momentum remains low on the daily chart BUT is still edging upwards so watch for any new breakout over 20.

Bullish targets: Any bullish 4hr chart hold above 6,550 would bring 6,600 and 6,700 into focus. After that, watch 6,800 followed by the pre-GFC High of 6,851.50 and pre-2020 High of 6,893.70.

Bearish targets: Any bearish 4hr chart break below 6,550 would bring 6,500 into focus followed by whole-number levels on the way down to 6,200 as this is near the 4hr chart’s 61,8% Fibonacci.

  • Watch 6,550 for any new make or break:

 

 

Gold:  Gold closed with another Spinning Top weekly candle reflecting indecision BUT this was bearish coloured and still below the all-important $1,900 level. The monthly candle was bearish as well.

As mentioned over recent months: the weekly chart still has the look of a broad Inverse H&S pattern; or some may see this as a broad Cupping style pattern. Both are rather similar though as they are bullish patterns and suggest follow-through to the order of magnitude of the depth of the Cup / height of Head. In this case, that move is of around either $800. Keep watch of $1,900 now that price action is trading below this neckline region!

$1,900 remains the region in focus for any bullish Cup or Inverse H&S breakout:

  • Any hold above $1,900 would support the Cup pattern thesis.
  • Any move back below $1,900 would support the Inverse H&S pattern thesis.

Traders need to watch this $1,900 level over the coming days / weeks especially as the US$ index is still below the recently broken 10-year support trend line:

  • any US$ hold below the multi-year support trend line could help send Gold higher.
  • any US$ move back above this support trend line could keep Gold range-bound. This would help to further develop the Inverse H&S pattern.

 

Keep in mind that ADX momentum still remains low on the weekly time frame though so keep an eye on this metric for any new uptick to give clues about the next momentum move; either up or down!

NB: The expanded view of the weekly chart below still shows a possible Bull Flag. This augers well with the Inverse Cup’n’Handle / Cup pattern.

There are revised 4hr chart trend line to watch for any new breakout.

Bullish targets: any bullish 4hr chart trend line breakout would bring $1,900 into focus as this is near the 4hr chart’s 61.8% Fibonacci.

Bearish targets: any bearish 4hr chart trend line breakout would bring $1,800 and, then, the recent Low, near $1,770, into focus.

  • Watch $1,850 and for any new 4hr chart trend line breakout:

 

 

EUR/USD: The EUR/USD closed with a small, bearish weekly candle having a long lower shadow and a bearish-coloured Doji monthly candle with both reflecting indecision. However, there is still the look of a potential 4hr chart Bull Flag as price holds near the monthly 200 EMA.

NB: Note that the longer-term target for any continued bullish movement, following the previous break of the 13-yr trend line, is the monthly chart’s 61.8% Fibonacci, near 1.40. However, a test of the 4hr chart’s 61.8% Fibonacci, near 1.19, would still fit within an overall bullish continuation thesis and move.

Bullish targets: Any bullish 4hr chart Flag breakout would bring 1.22 and 1.23 into focus. After that, watch whole-numbers on the way up to a previous weekly chart High, circa 1.26 and, then, for any continued push up 1.40.

Bearish targets: Any bearish 4hr chart Flag breakdown would bring 1.20 and 1.19 into focus and the latter 1.19 is still near the 4hr chart’s 61.8% Fibonacci.

  • Watch for any momentum-based Flag breakout:

 

 

AUD/USD: The Aussie closed with bearish-coloured Spinning Top weekly and monthly candles with both reflecting indecision.

The main point to note now, though, is that the AUD/USD has finally broken below a 12-week support trend line. However, the consolidation action towards the end of the week has rendered the 4hr chart a bit of a Bull Flag appearance so traders need to keep an open mind.

There are revised 4hr chart trend lines to monitor for any new momentum-based breakout.

NB: The longer-term target for any bullish continuation from the weekly/monthly chart’s Descending Wedge breakout is the 61.8% Fibonacci, near 0.90.

Bullish targets: Any bullish 4hr chart Flag breakout would bring 0.78, 0.79 and 0.80 into focus followed by whole-number levels on the way up to the weekly chart’s Descending Wedge breakout target of 0.90.

Bearish targets: Any bearish 4hr chart Flag breakout would bring 0.76 followed by whole numbers on the way down to 0.73 into focus as this still lies near the 4hr chart’s 61.8% Fibonacci.

  • Watch for any new 4hr chart Flag breakout;

 

 

AUD/JPY:  The AUD/JPY closed with a bearish-coloured Long Legged Doji weekly candle and a bullish-coloured Spinning Top monthly with both reflecting indecision. 

However, the 12-week support trend line was punctured last week, albeit then recovered, BUT this is now giving the 4hr chart a bit of a Bull Flag appearance so traders need to keep an open mind. 

AUD/JPY traders also need to keep an eye on the sentiment with stocks though, especially the S&P500 index, as the two are generally highly aligned; as the chart below reveals. Any continued pause, or deeper pullback, with stocks might render similar for the AUD/JPY:

 

AUD/JPY versus S&P500 (gold line): a higher degree of positive correlation:

 

 

There are revised 4hr chart trend lines to monitor for any new breakout and 80 S/R remains the main level to watch for any new make or break.

Bullish targets: Any bullish 4hr chart Flag breakout would bring 81 and 82 S/R into focus.

Bearish targets: Any bearish 4hr chart Flag breakout would bring 79, 78, and, then, 77 and the 7-yr trend line region into focus.

  • Watch 80 S/R and for any new 4hr chart momentum-based Flag breakout;

 

 

 

NZD/USD: The Kiwi closed with a bullish-colored Spinning Top weekly candle and a bullish-colored Doji monthly candle with both reflecting indecision. 

However, like with the AUD/JPY, the 12-week support trend line was punctured last week, albeit then recovered, AND this is now giving the 4hr chart a bit of a Bull Flag appearance so traders need to keep an open mind.

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart Flag breakout would bring 0.73 into focus. After that, watch 0.74 and 0.75 as the latter is the next major horizontal S/R zone (see weekly chart).

Bearish targets: Any bearish 4hr chart Flag breakout would bring 0.71, 0.70 and 0.69 into focus with the latter still being near the 4hr chart’s 61.8% Fibonacci.

  • Watch for any new 4hr chart Flag breakout:

 

 

 

GBP/USD: The Cable closed with a bullish-coloured Spinning Top weekly and a similar monthly candle reflecting indecision as price action spent another week weaving around the 1.37 level keeping this the level to watch in coming sessions for any new make or break.

NB: The longer-term target for any bullish continuation above the previously broken 14-yr trend line is the monthly chart’s 61.8% Fibonacci, near 1.75. However, a test of this major breakout region would not surprise.

There are revised 4hr chart trend lines to watch for any new breakout.

Bullish targets: Any bullish 4hr chart breakout above 1.37 would bring 1.38 into focus followed by whole-number levels on the way up to 1.50, a previous S/R region on the weekly chart. Any bullish continuation after that would bring whole-number levels on the way up to 1.75 into focus.

Bearish targets: Any bearish 4hr chart hold below 1.37 would bring a 3-week support trend line into focus followed by 1.365 S/R and, after that, 1.35 and the 7-month support trend line. 

  • Watch 1.37 and for any 4hr chart trend line breakout:

 

 

USD/JPY:  The USD/JPY closed with a large, bullish weekly candle and a bullish, almost ‘Engulfing’ monthly candle and has finally broken clear of 104 S/R. As well, the break above the 4-month trend line has effectively triggered a weekly chart descending wedge breakout.

Price action closed near 105 making this the level to watch in coming sessions for any new make or break.

Bullish targets: Any bullish 4hr chart break above 105 would bring 106 into focus.

Bearish targets: Any bearish 4hr chart hold below 105 would bring 104 back into focus.

  • Watch 105 for any new make or break.

 

 

 

GBP/JPY: The GBP/JPY closed with bullish weekly and monthly candles and has finally broken above the weekly 200 EMA. This is some achievement as it is the first weekly candle close above the weekly 200 EMA in three years; since early February 2018!

The weekly candle closed below 144 making this the resistance to monitor in coming sessions.

NB: The longer-term target for any bullish continuation above the previously broken 40-yr trend line is the weekly chart’s 61.8% Fibonacci, near 170.

Bullish targets: Any bullish 4hr chart breakout above 144 would bring whole-number levels into focus on the way up to the weekly chart’s 61.8% Fibonacci, near 170.

Bearish targets: Any bearish 4hr chart hold below 144 would bring 143 and a recent support trend line into focus followed by 142 and, then, whole-number levels on the way down to 140 as the latter is now near the 4hr chart’s 61.8% Fibonacci.

  • Watch 144 for any new make or break.