Market Analysis

Weekend Charts: Reality Check

reality-checkDespite playing a bear on twitter for a while now I’m primarily a trader who seeks out good risk/reward entries and exits. I can’t influence the macro and so there is really no point in raving against it. Yet my bearish view on the macro remains informed by a relatively solid understanding of the workings of finance, capital investment, economics, debt, and currencies on the one hand and a long studied view of how society at large is evolving. And the picture continues to deteriorate despite the many claims to the contrary. This bull market remains one of central banks who will never leave, buybacks at all time high prices to augment failing organic growth and algos chasing stops. It is a system based on liquidity excess and while i’m looking forward to trade from the long side the risk/reward is not favorable until some of this excess has been flushed out in my view. None of this has occurred so far. While we have seen some corrective action in some stocks this action has already been practically rendered moot with a continued and narrowing push of shrinking money flows into ever higher prices on the larger indices.

I’m certainly not oblivious to the fact that I, like everyone else, is working from a limit deck of data. It is also clear that what constitutes good risk and reward is a very subjective process and people are certainly free to change their opinions at any time.

But to be perfectly frank the lack of integrity to any analytical process or core view that I increasingly observe on channels like CNBC or on twitter is bothering me. Many of us, including myself, have made fun of Dennis Gartman who has been flipping and flopping on this calls whenever there was a change in the wind. Ralph Acampora came out with a 25% crash call recently, and promptly changed his view again when prices went up.

In our little twitter community I see the same thing. People that were bearish 2 weeks or even 1 week ago are now bullish as markets ramped to new highs. Just say you are bearish if prices go down and you are bullish if they go up. The end. That’s chasing price, but it’s not really a core analytical process. Chasing price oblivious to risk/reward has worked well a few times such as in 1999/2000 and 2006/07, but they ended in disaster for many both times.

I’m frankly concerned by the increasingly oblivious attitude I see by many now. It reminds me of these previous times. Nobody seems to care, nobody seems to notice and apathy is setting in. That apathy may be a major reason why trading volumes continue to shrink.

The stock market goes up every day, but nobody is happy. If they were there’d be jubilations, large volumes, conviction and celebrations. But there isn’t. They call this the most hated rally ever. Have they bothered to ask why?

Enough of the contemplation, but here are some key charts I wanted to share that convey some interesting points that you may or may not see anywhere else.

1. $OEX monthly. The $OEX represents the top 100 companies in the $SPX. Something notable happened this month: We crossed to new all time highs since the year 2000, barely, but we did:


A few additional items to point out: During the last 15 years a move above 74 RSI has not been associated with good risk/reward for the long side. We can also only observe 3 red months out of the past 18 and an unbroken string of months above the monthly 5EMA with a massive disconnect from the middle Bollinger band.

The monthly chart on the full $SPX tells a similar tale of uninterrupted strength:

SPX monthly

While I can point to a decreasing MACD divergence the fact remains that the monthly 5EMA remains untouched and continuous to be defended no matter what. With this backdrop it is tempting to ignore various divergences and simply say: Things are going up, what’s your problem?

Well, I have a few and I call them the reality check:

The $SPX weekly chart is showing a rather steep ascending wedge that looks to reach a conclusion very shortly:

SPX weekly

Note the RSI, like the monthly, is screaming overbought here. As I mentioned many people have completely changed their tune and are bullish now. Now. At this junction:


The $SPY has spent 4 days above its upper Bollinger band with multiple unfilled gaps below pushing against an upper trend line with RSI maximum overbought. Now one can certainly make the argument that a gap fill will produce further upside price action. Super Mario is throwing further gifts of QE this Thursday after all, and jobs Friday is almost always green (16 out of past 18 have been green). Yet there are hurdles that are largely ignored it seems:

The weekly $QQQ chart shows a strong run on shrinking volume right into major resistance:

QQQ weekly

Basically what we have seen is a move from the upper Bollinger band to the lower and a bounce back to the top of the band. Much has been made about the records in the $SPX, the $DJIA, and the never ending ascent of the $TRAN. Yet the weakling continues to be the Russell 2000. Most notably the monthly chart of the $RUT is raising red flags all over the place:

RUT monthly

Key points: The $RUT failed to close above its monthly 5 EMA for 2 months in a row now. In the past failures or successes at key MAs, such the 5EMA and/or the middle Bollinger bands have marked importing turning points. Note the imminent MACD cross-over. Previous cross-overs have produced a fast move to the middle Bollinger band at minimum. In short: New lows are coming in my view.

Please note also the $VIX has been declared dead everywhere and people are giving you bullish views right here in the cycle:

VIX monthly

While it is true that there have been periods where the $VIX was slightly lower than now, the larger truth is that it has spent the vast majority of its time well above where it is now. You are now asked to ignore this history and to bet on a further decline in the $VIX. While this could certainly happen the historical odds do not favor such a move.

In fact to be bullish here you need to be of the mindset that the following factors do not matter at all:

1. June seasonality is weak, mid term seasonality is also weak.

2. The $VIX is near historical lows, a time typically associated with extreme complacency & followed by equity weakness

3. All negative divergences do not matter

4. Overbought conditions of weekly RSI of over 74 does not matter

5. The largest weekly disconnect of the weekly $SPX from its 100MA does not matter

5. Low volume does not matter

6. The wedge formation in the $SPX does not matter

7. Unfilled gaps do not matter

8. The $RUT relative weakness does not matter.

9. Economic misses across the globe (such as GDP, retail sales, etc) in places such as the US, Japan, Germany, Sweden, etc do not matter.

10. Large corporate layoffs by giants such as Siemens and Barclay’s do not matter.

11. Dropping yields negatively impacting bank earnings do not matter

12. Reduced bank earnings as a result of dropping trading revenues do not matter.

If you can convince yourself that none of this matters and that the only thing that matters is Super Mario, POMO, buybacks and algo chases then by all means: Chase into new highs. Best of luck.

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