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Signal Fire

Signal FireThis summer is heating up. ISIS is overrunning northern Iraq, Syria is just stunningly horrible but nobody seems to care, but now things are getting more serious with Russia and Ebola. Nothing is potentially scarier than an incurable disease spreading across the globe. The world’s complacency is rooted in Ebola not being an airborne virus and it mostly impacting remote, poverty stricken places in Africa. It’s a horrible disease and the mere notion that a killer like this could one day emerge as an airborne contagion is the CDC’s worst nightmare I’m sure. This Ebola outbreak is the worst in history but its death toll still dwarfs what is happening in military conflicts around the globe, but it is starting to create some nervous headlines.

Most substantially at the moment Russia and the West are now engaging in a mutual sanction war over troubles brewing in the Ukraine. Putin must decide how much he’s willing to risk supporting the rebels and the West is trying its best to be surgically painful knowing there are no military options. Hit the oligarchs and Putin will crumble so the theory seems to go. No way of telling how this will play out, but the mutual sanctions are starting to get sizable enough that they will likely cause a slowdown in growth.

Along with shaky economic data coming out of Europe and a fresh 10% correction in the #DAX one must assume this macro set-up is all being carefully considered by the ECB. Draghi will opine today and there is nothing we can do but wait. He will either surprise or disappoint, so much of the early action today will be driven by what he has to say.

Yesterday’s action was principally positive but it wasn’t such that all of a sudden oversold conditions got magically removed. In fact the patterns emerging suggest a very powerful move may be in the offing:

SPX structure

That looks like a falling wedge to me and inherently that’s a bullish pattern. If not already long a break-out could be bought in a successful retest of the declining upper trend line. This doesn’t make me a macro bull of course, but I have to respect the pattern. Now note that this pattern arrives on a Thursday before OPEX with most still expecting a new low today or tomorrow. This has been the pattern for months and yesterday we did get a bounce per the January analog as well. So the timing of the bullish falling wedge is clearly a conflicting signal.

Is this pattern supported by other signals? Yes. Despite a new low we continue to see an improving picture  in the high/lows:

USHL

And the weekly chart shows continued support at the weekly trend line while $NYMO is also improving. Given the falling wedge pattern a coming retest of the weekly 8MA seems certainly in the cards. Knowing it closely matches the daily 50MA the target of such area continues to appeal as a technical target before further downside could be explored:

SPX weekly

But looking for the equivalent of a signal fire in a fogged up environment it is the $VIX again that may yield clues here:

$VIX weeklyNote that all $VIX peaks (and market bottoms) in the past year had one of the following two key elements: Either two topping candle spikes, or a lower high in the $VIX: Yesterday we got a lower high. I still favor a retest of the 200MA as a measuring stick before wanting to sell this market.

As we still have two unfilled gaps above and now 6 days without a proper 5EMA reconnect I would prefer to see work done to the upside before I feel comfortable selling this market:

SPX daily

I’m not saying we cannot drop from here or even today. Per January analog we totally can, but if we do I want to buy long here for a rally into targets during OPEX week. It’s admittedly a tricky set-up, but I like the positioning here. We scaled out some from good entries and I continue to hold longs here with flat stops in place. So worst case scenario I get stopped out and get to buy lower. Fine. The flip side remains a massive move higher per the falling wedge straight into the 50MA. Based on all the negativity, put and $VIX buying now, the market is not positioned for such a move. The short covering could be brutal and frankly seeing all this downside protection being unwound makes the short case then appealing again. We shall see.

From my perch I’m seeing the $SPY path below as my ideal scenario over the next few days. This scenario would negate the Thursday before OPEX week low that most are now expecting. So it remains the unexpected set-up:

SPY 15min

The most bearish outcome would be if we reached the 1970 area within a day or two as it would exhaust all buying and kill all shorts right into major resistance. In short: A sweet sell set-up. One can dream. For now we remain captive to the mutterings of an ex-Goldman banker in Europe and will have to trade the action as it unfolds.

Everything remains a trade and discipline trumps conviction, so you will find me opportunistically scale in and out and hopefully just keep clocking in profits.

 

 

 

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