Retest Likely But Jobless Claims Suggest Bottom Is In
By: Jeffrey A. Hirsch
May 14, 2020
Initial Weekly Jobless Claims of 3.3 million, 6.9 million, 6.6 million, 5.2 million, 4.4 million, 3.8 million, 3.2 million and 3.0 million the past eight weeks, totaling 36.5 million, is astonishing. The good news is the trend is lower and as we pointed out in the May Outlook two weeks ago a spike peak in Initial Claims and an immediate precipitous retreat has been an effective indication of a bear market low over the years. 
The chart we presented two weeks ago from the FRED database hosted at the Federal Reserve Bank of St. Louis compared the history of Jobless claims with the Wilshire 5000 along with the shaded recession bars. All the spike highs in claims correlated extremely well with major bear market bottoms during recession. 
We omitted the recent claims number as they are so large they would literally have been off the chart. Now that we have two more weeks of lower claims we present the recent chart of Jobless claims with the Wilshire 5000. (Gaps in the Wilshire index line are market holidays.) Clearly, the March 23 low and the spike high in Claims at the end of that week correlate quite well.
[Claims & Wilshire chart]
However, as we also pointed out in the May Outlook the Down Best Six Months, Down January Barometer and the triggering of the December Low Indicator suggest rough sledding ahead with choppy, sideways market action over the Worst Six Months May-October and the potential for several retests of the March 23 lows. With the market pausing thus far in May after the record April rally and posting several recent days of losses a look at some technical support and resistance levels for the S&P 500 may be instructive.
In the chart below we have left some of our old support and resistance lines that once again appear to be relevant. March 2020 saw the market plunge through every support level in about three weeks. We reclaimed the December 2018 and early 2018 support/resistance levels in three days initially. Then the S&P 500 began to bump in to resistance around three of our previous levels at 2815, 2875 and 2955. 
S&P 500 Chart
On the downside, 2725 support lines up well with where the 50-day moving average is at the moment. The market held that level in March and June last year and spent a bunch of time there in 2018. A break below 2725 would suggest we’re headed for a retest of the lows. On the upside, we first need to clear 2875 where we topped out in January before correcting 10% to the February 8, 2018 low. Above 2955 there is resistance at 3010 near old summer 2019 resistance and the 200-day moving average.
If we can clear 3010 we run into resistance at about 3115 where we broke through the uptrend line from the December 2018 bottom. 3210 is the January 31 low when we had the big selloff that turned the January Barometer negative. Finally, there is 3260 resistance where the market gapped down to start the big waterfall decline. There is a long way to go to reclaim these upper resistance levels and new highs. The path lower and sideways over the next several months is more likely as more economic numbers and the magnitude of the economic situation comes to light.