Market Analysis

Weekend Charts: Uncharted Territory

UnchartedWow. We really do live in unprecedented times. It’s one thing to talk about it, it’s another thing to actually do it. Mario came through. Big time. Burning the Euro to a crisp.

If you missed it I’ve outlined some more detailed background on the matter in: Laughing Central Bankers.

Today I want to focus more on what this week’s ECB decision implies for the next few weeks/months from a trading perspective.

Firstly we need to recognize the reality of this aggregate liquidity being a clear and present danger in this market. There is no precedence for this at all. Period. And these extreme currency moves have an impact.

Watch Art Cashin here and you can actually sense the level of discomfort on the CNBC panel with whats going on globally:


And so the massive QE programs that have contributed to the largest wealth inequality distribution ever are being turbo charged into the next phase. 80 people now have as much wealth as the bottom 3.5 billion combined. How this will have a happy ending remains a mystery and I suspect it won’t, but we are in the midst of this game still and not at the end.

Fact is we can’t know what will happen as we are truly in uncharted territory here but let’s briefly review of what did happen:

Just a week ago there were two predominant themes floating about:

1. OMG It’s a heads and shoulders pattern and we will tank.

2. ECB QE is priced in.

Well, it wasn’t a heads and shoulders and it wasn’t priced in.

So in context I’m really pleased that the price targets we had outlined all came to fruition despite the SNB surprise last week:

Price call

I’ve documented the details of this technical journey here in:

Managing Technical Set-ups

That said I have to also be a bit self critical here and acknowledge I didn’t hold all the way into the price target but closed final scales (with the exception of $VX futures short) just before the 3rd price target hit. But really nice gains all week though, in fact all month long, so no complaints from me at all.

But we are all human and subject to psychology. The thing that keeps sticking out at me is the action in bonds. The bond market is not buying any of this QE business or growth narrative. I saw it in the action in yields on Thursday and we saw it again into Friday:


Seriously? These are massive swings all over the map. Knowing that central banks claim to be missioned to achieve price stability one can’t help but shake one’s head.

And we know these massive currency moves also impact earnings. So a lot of moving parts and a lot of discomfort. Massive QE is not a sign of strength, rate cuts to now negative territory are not a sign of strength, but the TINA effect remains large.

And so it remains central bankers who remain the principle accelerant of price. The $SPY chart makes this very clear. When central bankers talk or make policy decisions it is then that markets jump higher:


Bulls have continued to point to great earnings as the principle justification for higher stock prices, never mind that a substantial contributor to earnings has been the mathematical game of buybacks. In essence presenting a rosier picture than fundamentals would indicate.

Earnings season is still young, but how’s it looking so far? In one word: Dismal.

Per FactSet 8% of $SPX components have reported. 4Q14 EPS so far have come in at 0.3% growth vs 8.5% in the previous quarter. Revenues at 0.6% vs 3.7%.

So far the narrative is not matching up to the facts on the ground and a general sense of uneasiness prevails.

What do the charts tell us?

Still business a usual as far as the basics are concerned.

$DJIA weekly remains in its channel but just below its weekly 5EMA:


$SPX monthly still shows a red candle but above key MAs:


The daily chart shows a strong bounce with a weekly close above the 50DMA  and a positive MACD cross-over but a potential double top:

SPX dailyAnd the $VIX got crushed again but managed to close above its 50MA as well:


In a way it’s a pat situation with markets still having to reveal their next big directional move.

It is for this reason we decided to lock in nice gains and largely move to cash and rather await the next set-up.

The weekly chart highlights the pivotal stage here in the next week:


As long as the ascending trend line holds markets have a chance to move higher and even make new highs.

The case for new highs could easily be made. After all we are far from overbought and massive new liquidity is promised to a market who has yet to show a gain for January and month end is approaching rapidly. Must. Mark. Up.

The #DAX broke out to new highs on this promise of liquidity and is now sporting a massive potential inverse structure:

Ignoring earnings for now bulls can also find comfort in the fact that M1 money supply expanded to yet another record high in January:


So what could possibly go wrong here? A break of the ascending trend line could invite a move toward the approaching 200DMA and weekly 50MAs, but providing confluence in the same general area of 1954-1965 $SPX.

Such a move would point to a 5 % corrective move lower from here. The structural precedence is there as the years of 2014 and 2000 has so clear demonstrated into the last week of January:

Jan analogs

Speaking of the 2000 analog how has it been holding up in the face in all this volatility? Actually amazing well as we are precisely in the price range it has indicated, but it also calls for a move toward the 200MA at least before chopping further along:


Note its continued call for a massive blow-off top in March/April. When does Mario Draghi’s massive $1.3B QE program actually launch? Turn our in March. Funny.

So this coming week could prove plenty excitement in either direction. We’ve decided not to front run it here and rather sit on well earned gains and wait for the next clear signal. But if things were to go badly for bulls this week there’s always your standard bearer to make things right:


Better pencil these dates in then:

FOMC meetings

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

Categories: Market Analysis

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


This site uses Akismet to reduce spam. Learn how your comment data is processed.