Markets – Macro – Technicals

Crescendo

CrescendoPrepare for 6 months of extreme volatility in both directions. We are likely in the process of a price crescendo that will drive both buyers and sellers mad. The recent action is already causing headaches for everyone, even the most ardent bulls. A market that never even has a down day and gets ramped higher in spurts anytime a central banker opens his or her mouth.

From the Bullard “QE extension” rescue in mid October to the BOJ action on October 31 and Draghi’s endless QE promises, markets push higher every time a central banker keeps repeating the same thing: “Whatever it takes”, “accommodative”, “moar QE”.

Yet the action remains highly divergent with select large caps driving the record price action with small caps and quite a few tech stocks woefully lacking.

So is the action all new? Have central bankers brought on the dawning of the age of Aquarius? Actually no, none of this price action is new at all. Separating cause and effect and just looking at the price action one could argue we are actually witnessing a complete replay of 1999/2000.

Let me walk you through the key chart elements that strike a high correlation.

Context: Back in 1999/2000 there was an air of invincibility. People were incredibly bullish, the Ryder bull/bear ratio was at record lows in the 0.08 range, markets soared, analysts kept raising their price targets and stocks could do no wrong. Much like today.

Then we saw a first chink in the armor. It was a quick September correction of 9% that bottomed in the middle of October, followed by a massive 15.5% rally within 24 days.

If that script sounds familiar it should as in essence we just did the same thing with bullish sentiment now virtually the same. We dropped almost 10% in September with a bottom in mid October and have rallied now 13% in 24 days.

If the script continues to have relevance what can we expect?

The good news for bulls? New highs are indeed coming.

The good news for bears? They won’t last.

The good news for traders? High volatility is coming with plenty of action to be had in both directions.

The bad news? It will defy all logic, seem random and will build to a final crescendo that will take everyone to hell and back. In short: Really exciting, but very difficult trading lies ahead.

If we are indeed continuing on a similar script, how could this all play out? Here’s the chart from 1999/2000:

2000 RM

The chart above suggests a pullback coming into the end of November to just below the middle Bollinger band, followed by a quick surge into early December followed by 2 weeks of chop, then a Santa Claus rally into year end and then a rough spring as profits are locked in in January. Then sometime in the spring (March back then) another massive rally (which was sold completely off back then), followed by more up and down chop.

The conclusions from all this? Following this script market highs may indeed come in the spring being another 9% higher from here so around 2,200 – 2,250 on the $SPX. Congrats bulls are right.

But so are bears as the conclusion of the 2000 crescendo resulted in an ultimate 50% correction. In this case this would bring us down to $SPX 1,125. Seems unfathomable? It did so then as well.

I’m not predicting this action, but I’m laying out what a repeat of this script implies. For now we can observe that central bankers are busy every single day to try to talk these markets higher. Literally every single day there are 2-3 central bankers either giving speeches or press conferences or releasing minutes or holding meetings. And each and every time markets are completely cueing off of what they have to say. This will not change for the foreseeable future. But be clear: This market’s price balance seems to squarely lay on their shoulders and any hint of rising rates will be closely scrutinized. Expectations are for rate rises in 2015 and certainly this would fit in nicely with the script.

What is the current action showing us? We see new highs on some indices with extremely overbought conditions with weakening internals and a MACD that looks ready to rollover:

SPX daily

The high/lows continue to be pitiful as they keep getting weaker from rally to rally:

HL

This weakening picture can be observed even in the strongest indices such as the $NDX:

NDX

In fact the $NASI seems very close to a sell signal and note even here this latest set of new highs is showing a negative divergence versus previous highs:

NASI

And of course we are witnessing weakness in small caps in particular with a negative MACD cross-over:

IWM

Aligning with the $IWM appears to be the $VIX which is ready for a bullish cross-over:

VIX

None of this spells doom or the end of the bull market, but rather an imminent pullback which is more than reasonable given the historic overbought readings we are witnessing.

But as the 2000 case so clearly demonstrates: We may make new highs, we may gyrate viscously up and down over the next 6 months, but in the end the economic cycle prevails and no matter how hard these central bankers try to jawbone this market: The underlying structure is weakening and the composite charts are continuing to show it:

WLSH

So strap yourself in, it’ll likely be a wild and, at times, maddening 6 months of trading ahead.

For more information about our trade philosophy or on how to become a member please visit the About and Membership pages.

Advertisements

Tagged as: , , , , , , , , , , , , , , ,

Categorised in: Daily Market Brief, Market Analysis

9 Responses »

  1. Good over view so true as to set. The feds in there buying the market to as to moves,BOJ,ECB and so on. With the dollar being so strong for the last 3 months this will hurt the 4Q when reports come out.This to is of importance !

Trackbacks

  1. Weekend Charts: KISS | NorthmanTrader
  2. Weekend Charts: 2015 Trade Strategy | NorthmanTrader
  3. Weekend Charts: Volatility Ahead | NorthmanTrader
  4. 2015 Paradigm Watch | NorthmanTrader
  5. S&P 500 Quarterly Musings | NorthmanTrader
  6. New Year’s Eve Flush | NorthmanTrader
  7. Laughing Central Bankers | NorthmanTrader
  8. The Analog is (not) Dead | NorthmanTrader

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

The material on this website is provided for informational purposes only, as of the date hereof, and is subject to change without notice and does not constitute investment advice.
Home | About | Disclaimer | Contact
Copyright © 2013-2017 NorthmanTrader
The materials on this website may not be suitable for all investors and are not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.