Markets – Macro – Technicals

Biding Time Remix

Biding-Time-Remix (1)Let’s face it: These markets are waiting for Janet Yellen to pull a rabbit out of a hat and are biding their time. Ever since the August flash crash (which was saved by circuit breakers btw) we have been stuck in a range, a wide range, but a range nevertheless. Signal charts continue to indicate that markets are due for a major bounce, but it hasn’t happened as rallies continue to get sold.

All the major central banks have indicated the willingness to maintain or expand stimulus policies, however we have yet to hear from the FOMC. How they can raise rates into a market with such global volatility at the moment is beyond me and so this upcoming meeting will probably carry the biggest stick of the year.

Yet this FOMC meeting is also scheduled right during OPEX week, oh what coincidence, and so next week is pivotal. Many people are expecting and are waiting for a retest of lows before committing cash. It’s the standard big correction play after all (see 2011):

NYSE

The global backdrop continues to be poor and the plain fact remains that without ongoing central bank intervention this global debt construct would fall apart (The Greek Butterfly Effect). We’ve talked about this at length over the past couple of years.

Many are now practically begging the Fed not to raise rates, including the IMF and Larry Summers.

Pathetic no? But so it is.

Ironically, the most bullish thing Janet Yellen could do is raise rates next week. Why? Because it creates certainty and this entire absurd dance is finally over. Worse for bears and underinvested bulls: What if this new certainty produces a rally as opposed to a retest? Tricky stuff. If Janet Yellen doesn’t raise rates and chickens out it’s the same nonsense all over again as it indicates weakness and a worried Fed. So ironically not raising rates may be bearish.

But who knows.  Lots of people are bearish and we’ve seen charts that show massive long $VIX and short interest (via Dana Lyons):

VIX

$VIX remains elevated with unfilled gaps below:

VIX

These gaps will get filled and to me it’s just a matter of semantics of the how and when. Are we retesting $VIX highs first or fill gaps first? You all know I’m looking for MA reconnects, but the longer they don’t happen the worse the long term technical damage. So yes next week is kind of mission critical for this bull market.

We’ve also talked about the 1998 scenario and let’s go into bit more detail.

The structure:

Low in August, then consolidation above the lows in September before a massive rally into the 200MA for OPEX and prior to month end, THEN new lows into October with a positive RSI divergence and rally for the rest of the year:

1998

The similarity to now is striking, especially the timing, but also the structure.

A replay for 2015 could look something like this:

2015

A replay suggests massive trades coming up and everybody would prove to be right ironically. The bulls and the bears.

We can’t know if it plays like this, but the set-up is there and hence I’m sticking to buying weakness here and am prepared to sell on a spike to MA reconnects.

Currently we are stuck here (updated to account for Friday’s close):

ES

So, for now I’m sticking with the 1998 playbook as it fits best for the here and now, but don’t think I’m married to it if the facts change.

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Categorised in: Daily Market Brief, Market Analysis

3 Responses »

  1. Favorable LIQUIDITY for markets;

    – net pay downs $10 billion US Treasuries/cash into dealer accts Sept 10

    – FED’s MBS settlements to primary dealers est $25-30 billion Sept 14-21

    – monthly printing by ECB/BOJ $65 billion and $65 billion

    $165 – $170 billion is a LOT of cash

    As you point out central bank willingness to PRINT More

    Due for the usual FOMC FED Resubstantiation rally? Timing is right

  2. Very interesting and informative.

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