SPX, Eurodollar, & Demand Side solutions to supply side problem

26 feb 2020

This is a very big picture post with a pattern that has occurred twice before in recent history. The bet, of course, is that the pattern will hold a third time, or closely rhyme. We are on the monthly chart of SPX and the Eurodollar 3 month futures. The most important thing that we can see is the arrows showing divergence between the SPX and Eurodollar price action.

We can see prior to the divergence a purple long term support line for SPX. When the Eurodollar pumps past the EMA ribbon that support line falls. The purple box shows the third instance of price action of the Eurodollar breaking through the EMA ribbon in modern history, given all of the modern developments in the world economy (NAFTA, Plaza Accord, Petrodollar, etc). After the purple support line fails a lower support is found on the base of the EMA ribbon.

The green boxes shows that support on the EMA ribbon to the relative low can be a very time intensive process as price action thrashes around before the final dip.

A zoom in on the Eurodollar monthly price action below shows that the EMA ribbon has been resistance for quite a long time and during this month price action thrust upward above the EMA ribbon and retested the 20 Month EMA as support. This is very promising confirmation that the uptrend will continue. Not 100%, but damn near close.

Now, about the demand side solutions to a supply side problem. This was highlighted to me while I was watching a recent Peter Schiff podcast, and he was talking about questions to the Federal Reserve Officials about how can the Fed really provide support to the flu, and how can the Fed help solve a supply side problem with demand side solutions. Peter pointed out that the last time this happened stagflation occurred during the oil supply shock of the 1970s.

Now we have a potential supply side shock coming from China, broadly, and from there everywhere else that exports goods that could be contaminated. The demand for these goods would be the same, absent the flu. But the supply of sanitary Chinese goods is very scarce. What can the Fed do to make people buy disease vector goods from China, or other countries this could spread too? Pile onto this the indebtedness of households and governments and we find ourselves pushing on a string to stimulate the economy.

The main assumptions of this post, which are totally not financial advise are, in decreasing probabilities, are

1) The current purple trend line on SPX will fail as support
2) SPX Price Action will proceed through the EMA ribbon to find support on the baseline (55M EMA)
3) SPX will bounce/consolidate from there
4) Once the EMA ribbon falls as support it may or may not be retested as resistance for a couple of months.
5) Once the ribbon fails as support SPX could drop another 33-50%, based on historic performance. Wither we get under or over performance remains to be seen.

Finally, and the most long term call, probably at least over 2 years, would be SPX returning to around 1500. Below is the complete history of SPY. The Upper Value Area is at about 156. A return to the double top to test that level as support would be a fundamental test of previous resistance as support.
tradingview.com/x/PYp1XnQN/.

Almost too horrible to contemplate would be a return to the purple support line show in the chart above; Less horrible would be a return to the 900 level. Both a return to the purple and black trend lines are the lowest probability occurrences, but they are still possible.