Markets – Macro – Technicals

Horsemen

HorsemenWelcome to volatility. It can whipsaw the most hardened pros, but as long as you have a trade plan with focus, persistence and discipline you can navigate through it. That does not make it easy as volatility implies elements of unpredictability and this creates pressure and the pressure can be frustrating especially if one’s positions get stopped or go against you.

It is precisely at this time of pressure where most people make a common mistake: They throw their plan out the door as the erratic action gnaws at their conviction and then lose sight of the bigger picture. Yes one will experience losing trades, it’s part of the game. How you risk manage these trades in context of the larger set-up is critical. This is where the opportunities for the big gains come.

Yesterday we saw a continuation of fear spreading driven largely by the 3 horsemen that have recently infected this market with uncertainty: Oil, yields and currencies.

We have spoken about them at length, but people are increasingly wondering if they are signals of a larger underlying problem the substance of which has yet to publicly reveal itself:

YieldCrudeEuro

That’s the kind of noise discussion that’ll have people doubt their conviction. Yes these are macro issues and they are impacting the tape, but I find them helping play out the part of the 2000 analog we have been tracking.

Consider the current track record for January so far:

SPX Jan A

The first 3 trading days straight down. So this multi-month structure continues to chug along rather precisely. Now I want to again caution everyone: Analogs work till they don’t, so always keep this in mind, but for now: Game on.

And here’s how it continues to project out going forward:

SPX A

Principally we would see strength into OPEX next week with a potential peak in the Jan 16-20 time frame, followed by a new low into the end of the month. The prospect for some sort of blow-off top in the spring remains a distinct possibility especially if we see signs of stabilizations coming from the horsemen.

Are we close to a short term bottom here? According to the analog we saw the low yesterday and may finally bounce today. Futures so far indicate this is a strong possibility:

ES fib

Other signs supporting a short term bottom here:

The $VIX put in another lower high and was rejected near the trend line:

VIX

$NYAD: We saw relative improvement despite lower prices:

NYAD

Stocks above their 50 MA has dropped into the bottoming zone:

SPX 50 AR

The participation index continues to hover near recent bottom zones and the $SPX pierced through its weekly middle Bollinger band, also a recent bounce zone:

SPX w

Likewise we saw bounces off of key MAs in other indices.

The $DJIA off of the 100MA:

INDU

The $IWM bounced off of its weekly 20MA:

IWM

The $NDX may put in a double bottom:

NDX

And the $NYSE held its trend line and is also far disconnected from its key MAs:

NYA D

And the standard bottom signal of course is the monthly 8MA which was also tested yesterday:

SPX monthly

In summary: We are at key support levels commensurate with this bull market’s standard MO. Until that changes and the analog fails this continues to be the structure that I’m trading. What speaks against lows being in? Mainly that RSI levels are not near 30 yet and we could still move lower on some of the indicators I outlined above.

Trade plan: We got some nice long positions yesterday and I’m aiming to ride them for an initial 5EMA reconnect and Fib retraces. I’ll scale out at key levels and raise stops on runners. Today will see the release of Fed minutes. Volatility such as this does not disappear suddenly so we may still see quite a bit of back and forth. If lows were to break again keep an eye out for Mella’s support levels on stream.

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Categorised in: Daily Market Brief, Market Analysis

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