The last couple of weeks have not been kind to fans of all kinds of bottoms to say the least. Double bottoms, triple bottoms, quadruple bottoms. Naturally I couldn’t resist making light fun of the efforts to buy these types of bottoms:

You know you want it. $ES #triplebottoms pic.twitter.com/ZlPwsW9Bo5

— Northy (@NorthmanTrader) October 9, 2014

But that’s why we have our Trading Humor section 😉 to keep things light. Trading can get stressful after all. Don’t let anyone fool you that trading is easy. It takes hard work and solid discipline. This is certainly what kept us on the winning side this week. While we traded both ways our bias was to the long side as I had outlined earlier in the week which permitted us to catch a massive up move. Yet the action made it clear a flush may be coming. Fortunately our trading process demands scale outs and we closed most trading longs by the Thursday overnight gap up, but kept runners with flat stops on.

Frankly my brain was fried by Thursday and we told members we should all get a rest and wait for the next set-up. Frankly the best advice we could have passed out given the Thursday reversal. This positioned us well to have a clear head for Friday and what is to come. What is to come?

Let’s have a look at some key charts. Firstly, let’s recognize that this dump does not come as a surprise to regular readers of this blog. We have been outlining the frailty of the internals for months and outlined the short case in our weekend charts segments for weeks. Examples:

August 31: Symptoms of the Fall

September 7: Rally Myths Busters

Here we are now. Not $SPX 2,100, but back to 1,900. Not a big deal though right? Look closer. To get an appreciation of the carnage that took place on Friday one needs to look no further than the $SOXX index. Holy SOXX! Did they rock their SOXX off or what?

So what’s this all about? Well it is the basic truth I’ve been outlining for a long time: The entire rally has always been based on funny money courtesy an inherently dishonest Federal Reserve that has masked the true underlying structural issues by claiming they can fix all this by flushing trillions of dollars of artificial liquidity into the system. What has it produced? We all know what: A highly skewed benefit toward a minimum amount of people. And here we are now with QE ending and global growth forecasts are shrinking faster than George Costanza at the pool.

The high/low chart makes this perfectly clear:

QE is ending and the boys of summer are leaving town. Fast. It was always about M1 money supply and that is now reversing and bye bye prices:

The problem now of course: US QE is ending and Super Mario’s QE is just hapless and no growth to be seen, but a Fed that’s freaking out about the dollar’s ascent. Hey geniuses, did you really think that currency wars would have a happy ending?

Now the good news in all this is we have a marvelous trading environment. Friday night’s close had twitter light up with 1987 references. Cute.

Well let’s have a look at the risk/reward here going forward and I have something for everyone 😉

For those bullish inclined take note:

The summation index has continued to move into deeply oversold territory:

Germany is at its most oversold in years:

The number of stocks above the 50MA has reached levels consistent with previous bottoms:

The $SPX is close to key weekly 50MA and trend line support:

But even if you are bullish you have to acknowledge that aside from performance chasing buyers will be challenged by significant topping patterns that will require serious repair work.

The $RUT oh boy:

The $NDX? Double bottom shot to pieces:

Why is that especially bad? Consider the monthly long term context:

Yea. Oops. It get’s worse for buyers. Unless a major rally can be staged before the month ends we may see major monthly MACD crosses.

First $SPX and note the MA breakdown:

Secondly the monthly $WLSH. This chart is a bloody mess:

None of this says new highs any time soon. Fear has made a comeback and with it come strong sell-offs and huge bounces. Fun trading, but not for the faint of heart.

Trade plan for members here: Sunday Game Plan.

For more information about NorthmanTrader please visit the About page.