Markets – Macro – Technicals

Red Heat

red heatLet’s speak plainly: The last 3 days sucked. To start with: Markets crashed and we weren’t short. Worst time to pick a vacation EVER. What’s even more frustrating is the fact that we’ve been talking about the risk that was in this market for months. Our analysis was frankly spot on the money, but we didn’t catch the move and trading into finding a bottom was brutal as prices just collapsed with virtually no bounces.

So ultimately bears were right and bulls were wrong. Full stop. However, and this is critical too, as Mella has been saying we were looking to buy lows for a major bottom as well and now that the data is in we need to review and assess whether we indeed have a major bottom here or whether this is the beginning of a bear market.

The other big issue yesterday was that buying a bottom was virtually impossible for most folks. And part of the reason was systemic. For one, markets were literally crashing, price just disappeared and I don’t care what people say on twitter or on CNBC or wherever: People got spanked big time:

Futures

These numbers came on the heels of obviously major declines the days before. So this went down faster and deeper than even I expected.

On the way we got stopped plenty times as the action was absolutely relentless on the downside. No trend lines, support levels, MA disconnects, nothing mattered. This was complete panic, pure and simple.

The action was so fast we had lock limit downs on several exchanges and here is where it got really ugly. As prices completely disappeared people got taken out of their positions all over the place. Worse, many brokerages froze completely, meaning customers couldn’t place orders, or their positions were taken out below their stops, and then markets rallied up without them.

Case in point: The Dow dropped 1,200 points and then rallied 1,000 points in the course of mere minutes:

YM

If this is not the definition of a dangerous high speed market then I don’t know what is. So you were able to either get in at this point or you were not.

I was lucky to get in, but Mella wasn’t because IG was one of those platforms shut down during the ramp. I know a lot of members got hurt because of this same issue. It really is outrageous and I’m really sorry this happened to those affected. The lesson: Some platforms are not as stable as others during a crash.

This type of market action can be extremely damaging to one’s psychology and frankly I was affected too. This is where most traders make a major mistake: They focus on the woulda coulda shoulda. Let me tell you: There’s no point to this exercise. You can’t trade the past, only what’s ahead of you. Same with revenge trading. I know it’s easier said then done, but it happens to everybody. Drawdowns happen. It’s what happens after that is key. And the key is to find your footing and if damage has occurred one needs to rebuild. Crashes are extremely rare and this was one. Markets will stabilize again and will provide plenty of opportunity.

Let’s walk through the charts:

First off, all market buyers over the past 9 months got wiped as we went straight to October 2014 levels:

SPX

Note the following: All buyers since October 2014 are now sitting on major losses. Hence part of what we saw was major stop running to the downside, with key gaps filled including the one from October. RSI: Majorly oversold.

$NDX: Same thing, the entire trading range wiped. $NDX stocks above their 50MA? ZERO:

NDX

$IBB? Completely wiped:

IBB

The $DJIA: Worse decline than even in 2011 with prices going back to 2013! 2 years of rally completely wiped out:

DJIA W

Now I can go on and on, but the message is clear: Bulls, funds, investors, etc are sitting on major losses and this was a significant market event. Full stop. Confidence is shaken, but the real extent of the damage is in the signal charts and I want to highlight how important this is: We have RECORD low readings on many indicators:

$NYAD lowest in 20 years:

NYAD

CPC ratio highest in 20 years:

CPC

High/Lows: Lowest since 1998:

HL

The $VIX? Worst since 2008:

VIX W

Stocks above their 50 and 200MAs low low low:

SPX 50

SPX 200

Frankly what these signals are saying is this: We had a major and rare market event. A crash. And these signals could imply a major bottom has been made. But we can’t know this yet.

So let me walk you through some other key charts to highlight the conundrum I’m seeing.

First off, note that major trend lines are completely busted:

RUT

SPX M

XVG Q

Done. Bull market over if I look at these charts. In my mind one of 2 things will happen now: We retag the trend lines and fall off to new lows or we run up to new highs.

The chart that guides me here is the monthly $NYSE, it’s a killer chart:

NYSE

Several factors to consider:

  1. $NYSE in essence tagged the monthly 50MA. With that MA moving up that was a bottom hit in 1987, 1991, and 2012. Major bottom.
  2. The $BPSPX hit 22 yesterday. Happened 3 times before. Major bottom each time.
  3. In 2000 and 2007 major declines resulted after a retag of trend lines before reversing lower into a major bear market.

And this is the very binary situation we are facing right now.

I’ve talked about the 1998 case before and as the high/lows earlier showed we have a repeat on that technical signal. Look at the chart now:

SPX 100

As we moved farther below the MA one has to wonder if yesterday was worse, but structurally it is still very similar.

The DAX also hit a key support level yesterday and bounced hard:

DAX

So we have to recognize that we just had a major corrective shock event and any bounce can go very far. Hence I’m keeping longs on for now.

My principle target is key MA reconnects and trend line tags and then we shall see. One potential scenario I muse is a the one below in case we have not hit a major bottom:

ES

That would still constitute be a major rally and basically reconnect us with the monthly MAs. Frankly that would make sense to me especially if we get there by early September.

So my trade strategy for now: I’ve taken some key scales over the past 12 hours. Last night I entered $NQ long on the weak close for a gap up play. This has worked beautifully as we are seeing a 60+ handle $ES move overnight.

Based on the charts above I want to be patient here and let positions run into Fib, MA and trend lines. I”ll post charts/trade strategy on member stream as price action develops.

I also highly recommend folks read this post by Mella.

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Categorised in: Daily Market Brief, Market Analysis

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