Market Analysis

Weekend Charts: Sherlock Holmes Edition

HolmesThe market is a beast and you choose to be in the ring with it. You get slapped, you get hit, you dodge, you try to grapple it, fight back, land a few punches (wins) yet in the end you get trounced with a surprise hit out of nowhere and are ready to give up, yet the beast taunts you. You simply won’t beat the beast unless you have a trade plan in place and execute it mercilessly.

“This mustn’t register on an emotional level” Sherlock Holmes – 2009.

Take a few minutes and watch this fight scene below in the context of what I described above and imagine yourself to be Sherlock Holmes the trader facing the market beast. It is a perfect analog to trading this complete lunatic market and how to deal with it:

And the crowd is stunned into silence. Much of the same could be said for many traders this week as real fear started creeping into market. After President Obama came out and announced the bombing of ISIS positions and futures dropped hard overnight with European stocks puking even further it was then that capitulation was felt, stops run and twitter was ablaze with 200MA, 1860 tests, etc.

I get it. The Russell was already below the 200MA, the $DJIA was testing the same, and the $SPX had broken a major weekly trend line. The fear was that geopolitical events would finally break the neck of this record bull run. And let’s be clear the corrective move so far had been pitiful, a mere 5%. As weekly and months charts show there is so much more serious corrective activity to be had and I’m firmly in that camp. As QE, buybacks and margins debt will inevitably come out of this bloated system markets will have to contend with this supply/demand shift and a cleaner process of price discovery will take place.

But for now the market is still subject to forces that seem to follow a pre-programmed script to achieve certain levels. Like Sherlock Holmes one needs to watch for signs and clues to solve this continuing puzzle. This week I started flipping long in my trading outlook as I noted that the market seemed to follow the January correction precisely in its up/down structure. And, so far, it has exactly done that as the Friday overnight low action put us into a new low below the 100MA:

SPY daily

As you see on the chart I had to manually add the overnight price dive action to reflect the futures drop which conveniently got us the gap fill. In fact, the futures low of $ES of 1890 got precisely into the buy zone I had outlined for premium members this week:

SPX daily

So in context the Friday rally was really no surprise. And if viewed as an orchestral piece with a preset tempo and purpose the next step wasn’t a big surprise either: Saving the weekly trend line. As I pointed out in the premium feed Friday morning:

Weekly TL SPY

This was of course at a time when $SPY had just gap filled at $191 and $192.8 seemed very far away, and mind you the $SPY had already covered tons of ground from the overnight low. Yet with the script in hand I gave out the following key targets for our roadmap with the weekly trend line in mind:

SPY 15-1

A few hours later:

SPY 15-2

I illustrate this to show how predictable the market has become when viewed in context of a script. Understand the script, know your levels and stops and trade along. And sure enough they managed to save the weekly trend line right into the close:

SPX weekly

And now that pierce of the weekly trend line has a familiar look and feel: Just like January. Magic. So Iraq bombings, Putin this, or Ebola that, it’s all noise. The trend line had to be saved and it was.

But we had other signals as well: The Russell refused to make new lows, the $VIX failed to make new highs and on the public feed I kept pointing out the bullish falling wedge that was forming:

So now what? Well, I could make a convincing case for business as usual. We got the Thursday/Friday low before OPEX, the January script calls for a move back to the 50MA in the next few trading days, NYMO readings are commensurate with previous lows and even the TRIN had a 2+ reading this week and folks on twitter are already throwing 2,000-2,100 targets out again. Could well be. This has been the script.

Additional arguments could be added to support the cause. For example Germany is horrifically oversold and could really bounce hard here:


Yet note things could also get a lot worse very quickly as in 2011 the last time QE ended. While the $SPX chart looks all business as usual major damage has been to other index charts.

The $DJIA for example is a mess after falling out of its rising wedge:


It also looks like a repeat of the January correction and a major bounce into key MAs cannot be excluded as a distinct possibility.

Yet let’s be clear: Nothing of real substance has happened yet and markets can easily be due for so much more pain when viewed in any historical context. The real selling has yet to come:


For now the market has dodged another bullet and the script has helped us navigate it quite nicely. Yet the monthly chart also makes clear this party will not last forever as the monthly MACD looks to want to cross over:

SPX monthly

For now the monthly 8MA and 5EMA are saved as the script has demanded for 2 years now. Next week is monthly OPEX and it is VIX execution time. As I pointed out on Friday, bears needed a $VIX spike, but they didn’t get it. A test of the 200MA is certainly part of the script:


Such a test could push us anywhere from 1942 to 1970 on the $SPX. Then we shall see if the script is ready to change. If it does, don’t forget Sherlock Holmes’ advice:

This mustn’t register on an emotional level.

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