Markets – Macro – Technicals

Weekend Charts: Something Big Is Coming

somethingbigWe’re about to see something very big. When I say “about to” it could be next week or it could be in 6 months. I frankly don’t know and if I’ve learned anything as a trader and analyst over the years it’s to keep any certainty in check. But everything I see points to high odds that something rather radical will take place in equity markets. Not something small like we have been seeing, but something huge.

Let me walk you through the latest evidence.

Firstly let’s briefly review this latest week. It has been said that there are two certainties in life: Death and taxes. Let’s add a third: Whenever this market is about to break down it will get saved no matter what.

I present the $DJIA weekly chart. We broke through the trend line, things looked ready to break down and BOOM:

INDU W

There was a time when break through support was indicative of more downside to come. No more. Breakdowns are the biggest buy signals. You must be mad you say. Really? Look at the evidence. What could be a bigger buy signal than financials breaking below their 200MA?

XLF

The proximate cause for sudden levitations and rallies remains the same: Central bank intervention and jaw boning. The evidence is fairly straight forward. This week alone markets got treated to this:

INDU D

Every. Single. Day. Fact of life. Deal with it. It’s part of the current environment.

But earnings you say? We must be going up because of earnings growth. Are we?

EGR

But that’s just this month. Things must look really great going forward. After all P/Es are at their highest in 10 years:

P:E

So the earnings projections must be expanding going forward? No. Such. Luck:

EPS

No it’s not earnings growth that’s pushing stocks higher. I’ll tell you what it is. The same thing that has been pushing stocks higher for years: Liquidity and money supply. Yes M1 made another all time high last week and BOOM you got a rally:

M1

Go figure. I’ll add analog seasonality to the list. After all we had been monitoring 2014 and 2000 as key trackers and went long for a reason: Both scenarios called for sizable moves higher in at least the first 5/6 days of February:

2000:

SPX 2000 F

2014:

SPX 2014 F

The big question on everybody’s mind of course is what’s next. Mella and I have been pretty vocal about some sort of blow-off topping move a la the year 2000 being a possibility. In fact, Mella has outlined her target possibilities very clearly:

Why this view of a massive break-out being a possibility here? With earnings growth going down and estimates coming down? 2 reasons: The charts on the one hand, and the massive liquidity that keeps being pushed into this market.

This week the PBOC announced another rate cut on bank deposits. When will it go into effect? March. March of course is the same month that the ECB will officially launch their asset purchases and then the party is really going to get started:

CB

What do the charts say? They tell a very interesting tale actually:

Let’s start with a couple of familiar ones:

1. $RUT. With mechanical precision it’s been bouncing off of its weekly 50MA and in the process has put in a potential inverse heads and shoulders:

RUT

Note the neckline was touched and rejected again this week. A break through there and one can expect a massive break upward. Line in the sand.

2. $NDX. A bull flag ready to burst higher inviting a price target of the year 2000 highs:

NDX M

Not so familiar to most people is the $XVG, or the Value Line Geometric Index. Despite all the bullishness in the recent years it has failed to make a new high. In a way it is the bear’s last hope as it shows that the market has really been driven to new index highs by large cap stocks but not the larger market. However, unlike the previous two big tops, it has not immediately rejected here, it rather looks to have consolidated just underneath resistance and refuses to break lower:

XVG monthly

You don’t have to be a chartist to recognize the implications were the $XVG to breakout here: It would be enormous. And any bear should shudder looking at this chart.

Now one could point to the recent expansion in volatility as a sign of lower prices to come. Frankly this has been my concern as well, but a look at the $XVG price history versus the $VXO brings an interesting revelation:

VIX M

An expansion in volatility in 1996/97 actually accompanied the vast price expansion that followed into 2000. So expansion of volatility is not necessarily a sign of lower prices to come.

Now before you eBay off the kids and stuff all rate depreciating cash into the stock market let’s also outline some distinct concerns here.

For one, as outlined above, the 2000 analog still calls for buyable lows in February. The 2014 case suggests there is no more downside and we go straight up.

We can’t be certain one way or the other of course, but as strong as the rally has been this week it also lacks conviction as the internals remain weak:

A200R

HL D

These weak internals come at a time when we have monthly MACD crosses and in recent years these can be signs of serious trouble:

SPX M

WLSH M

If you view these charts in context of the recent action in bonds and utilities the risk of further downside being rather imminent should be rather self evident:

XLU

TLT

Bottom line: We are near a critical juncture for this market. The analog calls for one more potential downturn of size in February. The big difference to 2000 of course is the daily presence of central banks in this market. The downside has remained elusive and temporary at best and massive liquidity is being added to global markets. Based on where we are in the charts one thing is pretty clear: If bears want to have a prayer on bringing this market down they are rapidly, and I mean RAPIDLY, running out of time. My take for what it’s worth: If the $RUT or the $XVG cross these major necklines we will see a massive explosion in price that will make this week’s 900+ point $DJIA rally seem like a little blip in the park.

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7 Responses »

  1. Reblogged this on FXTraderPauls Trading Adventures and commented:
    I like this guys work and his view on life and markets. Take a read.
    Paul

  2. As I observed on another site, when one looks at many of the weekly charts for several market leaders like COST, DPZ, SHW, ALK, LOW, V, etc. (and especially when focusing on the current price action from Oct, ’14 to the present) I have to wonder if perhaps we have already seen the blowoff that so many people are waiting for?

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