Markets Macro Technicals Sven Henrich

Deviation

deviationContrary to popular belief technical analysis doesn’t predict where markets are going, but rather it helps traders like us assess risk/reward and probabilities and then we try to trade that assessment. Markets at the end of the day will do the unthinkable on occasion. They crash, they levitate, they do nothing, it’s all a mixed bag. But in general markets follow some general principles, and one of these principles is equilibrium and when they deviate too far from an equilibrium they seek out a balance. Hence, after big corrections, we see the tendency to reconnect and seek balance.

This was the premise for the MA reconnect trades we talked about after the August correction. But the pendulum can swing in either direction. And what we are witnessing now is frankly historic in the larger macro context. And whenever markets do something out of the historic norm one better pay attention.

Before I go into this today I want to briefly talk about the balance we’re trying to find in sharing information. You all have found us in some form via twitter. It is where we have been sharing information for a very long time and people seem to like it and appreciate it and I presume that’s why all of you are here with us. Sharing is caring right? But at what point does it become too much? What’s the right balance? Now we’ve grown in the past few years and in process of doing so sometimes the information now gets spread more widely. It has happened recently and now it has happened again and the question of the jinx is being raised. The jinx being based on the notion that once too many people see a pattern it becomes invalidated.

The example in the last 24 hours being my post on Symmetry. In our online social world we can never control what goes viral and what doesn’t and I certainly had no clue it would get this distribution. MarketWatch has covered it in 2 articles now:

Why the S&P may already be in a bear market

The ominous chart pattern lurking

And on top of that Zerohedge and David Stockman.

So between those sites and mine the chart has gotten very wide distribution and promptly markets rose above the price level. Yet I cannot accept that a chart we put out can have a market influencing jinx effect. No way. We’re not that important, the market is too big.

We share some charts publicly with little to no commentary in technical charts and once in a while we put out a larger article, usually focused on the macro. Our every day stuff only happens in front of members, our detailed analysis and updated charts are distributed only in a very small setting and we are keeping it that way. I just want to make that clear. That being said, I’ll keep an eye out on making sure that key tradable information is kept tight until we had a chance to trade on it and to keep the perceived jinx factor to a minimum. I trust this makes sense.

On to markets.

There is nothing usual about these markets right now and I see historic deviations in many parts of it. We’ve talked about some of these in the past few days, but I want to highlight some and put them in context.

There are 3 key elements of this rally that are really standing out in my mind:

  1. The historic MACD deviation
  2. The historic upward disconnect from the 50MAs
  3. The narrowness of it all driven by few stocks.

Let’s start with the latter. You have seen the RSP chart so iIwon’t repeat it here again, but look at these charts of important sectors and companies and tell me where the bull market is:

WMT

IBM

XLU

BKX

$WMT, $IBM, examples of stocks just getting hammered. Utilities? Meh. Banks? Meh.

In fact if I look at the $XLF it’s another pattern that suggests a major retrace to the .618 fib to come, very much like 2011:

XLF

But even some of the big drivers of valuation such as $AAPL have patterns that look like they could really break down on the next down move:

AAPL

Considering we just rose 13% on the $ES since September 28 in virtually a straight line all these patterns look weak. Very weak.

And this 13% move has resulted in historic deviations. I mentioned these on stream yesterday, but here are the updated charts and it is really stunning.

The $DJIA:

DJIA MACD

In all of market history we have never seen such a MACD deviation from the norm. There are only 4 instances coming even close. Sort of. 1998, 1999, 2000, and 2014. And guess what? ALL reconnected with the 50MA at some point and some hinted that a bull market was coming to an end at some point in the near future.

Consider the $SPX here:

SPX MACD

Here we only have 3 instances of similar deviation. 1998, 1999, and 2000. And note the shrinking expansion in new highs. The 2000 top came on the heels of a shrinking high/low expansion. Pretty much what we are seeing now.

But, as these cases also show, this can drag on for months even a couple of years. So these MACD deviations are not topping signals, but indicative that a 50MA reconnect is in the cards. Currently that 50MA is at 1982.

But, as the 1998 case also shows, it may be a key buying opportunity before the big blast off.

Not having adjusted the MACD level we are currently seeing we can observe that this level of MACD deviation also occurred in December of 1998:

SPX 98

What did it produce then? A 4.8% corrective move before moving higher. A similar move would bring us here to about 1995 on the $SPX. Close enough.

And such a retrace move remains perfectly reasonable once we see evidence of a price break. I say reasonable especially in context of the massive move we just witnessed. Consider the $OEX just created gains in 5 weeks that it took 6 months to produce even during the height of QE:

OEXM

None of this appears sustainable hence I remind squarely on the sell train here. I’m not saying that the voices calling for new highs into year end are wrong. We may still have a 1998 type blow off coming. All I’m saying is that I want to see a corrective move first, also a la 1998.

It is during this corrective move that we can ascertain how real this rally really was.

Why real? Well we are made to believe that prices should make new highs with this fundamental backdrop:

EPS

And this is where the 1998 analogies just come short. We had much higher GDP growth then and actual semblance of inflation:

GDP

We have none of this now. So something is off with that analogy. We are looking at less than 2% GDP growth in the 3rd quarter. Revenue growth is negative and so is EPS growth. All time highs?

Well the $COMPQ chart surely shows that being a possibility:

COMPQ

If that MACD turns and crosses north this chart could fly and in this world of TINA (there is no alternative) all things seem possible.

But, from my perspective, the signasl keep flashing warning signs:

NYSI

NYHILO

So I remain patient. There are no easy answers until this market shows signs of rolling.

Last week I offered this thought on structure:

ES 10:30

We’ve now reached this price range yesterday. We could still squeeze into the 2103-2108 zone on the $ES, but I’m sticking with my main premise: This historic deviation will resolve itself like all the others: With a sizable fib retrace.

ES

And once we get there. then we can talk 1998, 2011 or even, imagine that: 2015 🙂

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2 Responses »

  1. One cannot rule out that this time IS (a little bit ) different.
    1) there is no euphoria
    and because of this….
    2) there are an increasing number of buyers of last resort a.k.a. Central Banks.
    So, could it be that there may potentially be a race on by Central Banks to acquire ‘Financial Assets’ (before they run out) and not get left behind?
    Given that in order for the giant Ponzi to keep going for the foreseeable future, CBs will HAVE to expand their balance sheets potentially driving inflation down even further, the traditional ways of valueing assets may be becoming less valid.

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