Daily Market Brief

September Strategy

StrategyAs we are embarking on the 5th week up with another Monday gap up I want to outline my strategy for the next few weeks going into September. You all know my larger macro thoughts and I’ve outlined them again this weekend with what are hopefully charts and facts that demonstrate the underlying weakness of this rally.

Principally my sense is we are finding ourselves in a drawn out topping pattern that has been building for months and will likely come to a rather violent resolution sometime in September and/or October. As strenuous and relentless as the action may seem at the moment it is actually perfectly consistent with topping patterns of the past.

I’ll outline two examples here. One is the monthly pattern of the #DAX:


Note that both the 2007 and 2011 tops were exhibiting strong bottom candle action off of support, 7,500 and 7,000 back then. Currently the comparable level support sits at 9,000. The current pattern leaves room to 9,800 or so and a break of 9,000 would invite a rather violent rush to the downside with the 8,000 as a likely target.

This week is all about the ECB of course. European data has been stinking up the joint these past few days but the anticipation of QE has dropped the Euro. BOJ continues on a similar path and the Yen got crushed overnight resulting in a massive Nikkei rally that I shorted. So note all that is happening here are currency games that are pushing equities into multi-month topping patterns.

The other big topping pattern remains in the $TF:


The upper push here resides in the 1190/1200 area. QE is ending in October and the $RUTs P/E sits over 50. It is exactly with this backdrop that we are seeing people trampling all over themselves raising $SPX targets. Last week it was $SPX 2,300, today it’s Morgan Stanley pushing for $SPX 3,000. Oh it’s all so quaint. What they are doing is quite obvious. They are spreading fear. The fear of missing out, all on board, hurry, buy stocks. The motive? Selling supply. Alibaba is coming out with the mother of all IPOs and fees have to be earned. Note that this IPO is conveniently timed a day before $AAPLs big event.

September 8 and 9 are hence shaping up to be super important events for the market coupled with Draghi’s ECB announcement this week. Can I create a better confluence for a market orgasm? Probably not and it’s all right ahead of September OPEX and we know we are looking for a low into the Thursday/Friday the week before OPEX.

So the structure is lining up nicely for all to get what they want: Pumping targets right into a huge IPO/Tech announcement event and then rug pull. It is one scenario and it is one I am keenly aware of.

Everything I outlined last week and this weekend still applies. Weak volume, weak internals and a steep, steep trend line set-up that could really use some room to breath:

ES daily

It was this confluence that led me to add to scales this morning. Principally I continue to view markets as highly dangerous here as central bank intervention is really all that is still moving this market. What we haven’t seen yet is a powerful daily reversal.

Those can occur any day and wreck havoc with charts and unfortunately that hasn’t happened yet. Ideally I would like to see a new high that gets reversed into a big red down day (BRD) resulting in a bearish outside day.

Until we see something like this we have to assume the push can and will continue. We know from past rallies that markets now plays the 5EMA and 8MA support game. Right now this is exactly what we are seeing again:


Gap fill and 20/50MA confluence notwithstanding these are the basic MAs that need to be broken before anything can start. And until they do the best policy seems to be to buy calls every time we hit these MAs until they break.

How do we know breakdowns are no longer fake? Frankly we won’t know until the main structure changes and that is to break, on a monthly basis, the 5EMA and 8MAs:

SPY monthly

But that’s a 100 $SPX points away and that would rather seem silly to wait to short until then. This is how people have been getting smacked these past 2 years. The only time to successfully short in the past 2 years has been at top extensions. Once one of these set-ups actually turns into an intermediate top it will be a glorious trade if people have the fortitude to hold the trade.

For now everyone is covering on the smallest dip out of sheer fear and taught BTD behavior. This rally has extended itself so far that a final break of the structure will likely be extremely violent. Central banks keep trying, but Draghi and ilk are looking extremely inept and desperate here as global economic data keeps unmasking their policies to be complete failures.

But so far they are succeeding and risk has to be managed. How high is the obvious question? To me it’s a function of time and event confluence coupled with seasonality. Per the earlier script they are running out of time. What, exactly, is to happen after September 9?

For now what we are seeing is week 5 of this uninterrupted ramp. Per my postings in the past week or so I’ve outlined upside into the trend line confluence above into a $SPX 2020-2030 prize zone. It is rising so one needs to be aware of this, yet it remains a bearish pattern in my view and one that requires ever more upside to maintain its structure:

SPX weekly

The weekly $ES pattern suggest a retest of the weekly 13MA as a minimum move for the ‘V’ rallies:


In this case it implies a visit to the 1966-1970 area which would match the $SPY 197.5 gap area. If this happens this week it might set up for a flip long trade into the September 8/9 events before flipping back short for Thurs/Fri pre OPEX lows.

As you see September has the makings of a wild month which will allow for wide long and short swings.

To sum up the strategy:

  1. Long calls on daily 5EMA/8MA hits until break
  2. Scale short into core positions into 2020 $SPX this week (if it happens)
  3. Initial cover on $SPX 1970-75 should it occur THIS week.
  4. If THIS week then flip long for Sept 8/9 spikes
  5. Selling short any spikes into Sept 8/9
  6. Flip long into Thur/Fri pre OPEX week low.
  7. Stay short on any weekly close below $SPX 1965 (8MA)

SPX weekly MAs


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