Well that was different. No, it really was. Last weekend I made a strong bullish case and even outlined a chart straight into the $SPX 1960-70 area that we kept tracking on twitter all week long. Still it was stunning to see prices just ramp in a diagonal shape across the screens with Monday’s open being the low and Friday’s close being the high of the week.
As bullish as I have been I need to acknowledge that something strange is occurring as markets are in the process of doing something they have never ever done before. None of what we saw the past two 2 weeks has any foundation in market history. And I’ll support this statement with evidence, it’s quite something, but bear with me first:
Let’s review 2 very interesting factoids that you can either put in the realm of coincidence or agenda as you choose. When market’s started reaching the 10% correction point and people were beginning to soil themselves and the Fed’s Bullard had to come out and squeak “QE Extension” several key technical worry signs were on everybody’s mind:
1. The weekly trend line going back to the 2012
2. The weekly 50MA
3. The daily 50MA
Yea I know many were focused on the 200MA, but frankly they were wrong and got railroaded trying to short the market there.
So what happened after Bullard? The first key goal was to recapture the trend line and the weekly 50MA. They did it by the close Friday a week ago. This week? Don’t let bad earnings or economic reports or Ebola distract you, the goal was the daily 50MA and they got it right during the last minute of Friday’s close:
But more than the daily 50MA we are keen on watching the weekly moving averages as well and one has to stand in awe at the precision of the recapture effort, the weekly 8MA and weekly middle Bollinger band they were all recaptured in the last minute of Friday:
Now note in the course of this effort $NYMO and the participation index reached solid overbought readings. Yet none of this all seems particularly out of place until one steps back and starts staring at the monthly charts and one can’t be but in absolute awe in regards to what just happened:
We are witnessing monthly candle action like we have never seen before. Ever. That’s a very long time. Check it out:
Even the monthly $VIX:
In all recent past we can observe that monthly $VIX break-outs and index breakdowns had some sort of retest and certainly had a monthly close nearer to the middle of the range. It’s as if markets are racing about with absolute excitement and joy to celebrate the last Fed POMO action this coming Monday.
Odd enough yes? It gets better. This week’s massive rally, including Wednesday’s 300 point $DJIA ripper surely would have produced new lows on the $VIX, yes? Nope, not even Friday’s close into the the 50MA produced a lower $VIX:
Of course the 3 day in a row record consecutive +10% drops in the $VIX may have contributed to some pause action, but I doubt that’s the real cause. The real culprit may be hidden behind the shockingly underlying weakness in the price action. High/Lows have been weak since the summer and a warning signal and even with this massive bounce one would have expected to see a sizable expansion in recovery here. But not only did we not see this we saw a contraction in the latter part of the week. I mean really?
None of this means we can’t go higher, but the combination of factors suggests that some sort of back testing is highly likely. Monthly candles like this have no bearing in history and vertical price action accompanied by weak internals are not exactly convincing. They do certainly look impressive on paper and the repetitive gap up action smells of shorts having been burned alive:
Yet this coming week QE is to come to an end and as I pointed out in the public stream there is zero evidence that US equity markets have been able to support their price levels without some sort of FOMC intervention since 2009:
As a matter of historical fact: Since 2009 the US equity market has not been able to sustain price levels without QE pic.twitter.com/uJHkOwoaMM
— Northy (@NorthmanTrader) October 24, 2014
So what’s Janet’s game plan? What is crystal clear for now is that the Fed did not like the October correction and felt it necessary to have Bullard talk about QE extension. This magic word produced the biggest monthly candle ever with most still being fully long this market:
So the Fed showed nerves and everybody jumped. So why is the Fed scared? Maybe, just maybe, they know they have created an absurdity, a Ponzi scheme that cannot survive without the ongoing hollowing out of companies. Asides from some shining examples such as $AAPL many large cap examples have been struggling big time during earnings season so far, $IBM, $SAP, $MCD, $NFLX, $AMZN etc being concerning examples. And the ones that do beat nicely? Often it’s just a Fed enabled debt financed sham a la Caterpillar:
And so next week traders will face a very tough call:
1. Trading long following a historically unprecedented monthly tail and with QE ending, a process which has zero track record in resulting in higher prices in the past 5 years…
2. Well 2 is really the same old expensive parlor trick:
Do you feel lucky? Well do you? pic.twitter.com/ee9PhQcZko
— Northy (@NorthmanTrader) April 14, 2014
Either way something strange is going on in this neighborhood.
But on the bright side something magical has happened on the Bull/Bear front. If you missed the announcement this week check it out here: Bull Bear Magic 😉
Categories: Market Analysis