From yesterday’s Member Update:
“I remain a buyer of weakness while cognizant that price may still go lower, but my sense is we are closer to a short term bottom than to a top as charts very much flash signals reminiscent of the 2011 bottom and we are seeing massive standard deviations across the board.
As this quarter is actual fiscal year end for many funds across the board yesterday’s action may have had a lot to do with rebalancing and when this process is over I expect a major rally sometime into October.
So caution bears, this may all be a major trap…..There are huge structural factors at play and if I’ve learned anything it is not to short into the hole.
My aim is to scale out on strength, but stay long, hedge at resistance and rebuy weakness.”
We didn’t hedge yesterday as we didn’t even hit the 5EMA, but we scaled out and then added back on weakness. And the final stop run last night was the trap that was sprung. People’s psychology was worn yet again, bearish stats were thrown around and new lows were expected. And, to be fair, we got them. On the $RUT. Mella and I were talking about positive divergences emerging all over the place. Down & dirty tricks indeed. Not only did we see a massive and fast reversal into the close overnight futures are just ripping:
This was the move I was anticipating that were markets setting up for and hence I stuck to process religiously. And as I said on public stream last yesterday:
If a bottom feels good to buy it ain’t a bottom.
— Northy (@NorthmanTrader) September 29, 2015
It never feels good to buy at a bottom. It feels awful. And of course they make you work for it. And by last night people just groaned at the renewed weakness. Down and dirty games.
Now is the bottom in? No idea, but people poorly positioned overnight are feeling big time pressure. Yellen is up today and we have that $150B repo scheduled.
But it seems highly unlikely they are able to save the month or the quarter. So the technical ramifications will need to be closely scrutinized.
Let’s have a look at some charts.
The daily $RUT is a technical thing of beauty:
And so is the DAX:
And last night’s dump got us right to the $SPX trend line:
And just in time too and now of course the weekly close is key as we are near a break down here:
But note one subtle thing: The $VIX made a lower high on the new low of the $SPX:
In short: A lot of pieces are falling into place here for a major rally.
And the key question immediately coming to mind is this: What about the monthly and quarterly MA breaks?
Here’s the monthly chart and barring a 100 handle rally today we close the month well below the MAs, but a big rally could prevent the cross-over and possibly create a fake cross as in 2011:
I’ve reviewed the larger corrections fitting this time frame and again only two really show similarity in structure: 1998 and 2011. Both produced massive rallies into the Fall after a really tough August and September corrective period:
1998 produced new highs in the same year, 2011 did not until 2012. But either way shorts got completely ripped in October and both made lows in early October.
One may rightfully ask what would trigger such a rally? Plenty of potential triggers frankly, but the one that sticks out the most in my mind is high yield. Any relief rally there and stocks would fly imho:
So we need to keep watching this closely.
Another trigger? Rebalancing. What both 1998 and 2011 had in common was a massive exodus and shake-outs in the Ryder bull/bear ratio. At least until 2015 these moves looked big on the chart.
What happened this year is simply without precedent:
Shakeouts can produce massive countermoves. And if this is a bear market then a massive counter trend rally here would just be the ticket.
So the price zones Mella and I have been talking about, 2040-2060 $SPX, would definitely do the trick.
So there, I gave you 2 potential big triggers for a massive rally without even mentioning QE4.
In 2011 the rally ended in late October and produced another very sizable corrective move in November. I view this as a possibility here as well and will definitely look to want to fade a move into the 2040-2060 price zone if and when we get there.
But first things first.
We need to see a sustained price above $SPX 1900 and then a recapture of MAs and trend lines. We can of course completely fall apart again hence I took several scales profit across the board in overnight action.
Will Yellen cause another sell-off? I don’t know. If she does, I will stick to process: Buy weakness, scale out on strength, hedge at key resistance points. Rinse & repeat till it sticks.
As of now it looks like it could be sticking. We shall see.