Markets – Macro – Technicals

Pendulum Swing

pendulum-swing (1)Notice: For years I’ve been sharing detailed market analysis publicly on a regular basis and I think it’s fair to say both Mella and I have been extremely open and forthcoming with our technical analysis. Markets have become much more demanding in 2016 however and this simply means our primary and full focus has to be on our members. Don’t get us wrong we will still share charts, but the public detailed market analysis will be less frequently so. For those who want to stay in touch with our daily updated analysis you are welcome to join us for our daily market brief.


On to markets:

It’s a horrific bear market. That’s the word on the street after all. The market’s mood is absolutely dire, the internals stink and the action in crude is just dreadful. Large lay-off announcements are on the wires constantly. Crude price targets of $10-$20 abound, Soc. Gen. is out with an $SPX 550 price target and and this week we saw a call advising to sell everything. Wherever you look it’s doom and gloom.

And look, I’ve been raising bearish concerns for a long time and outlined them all in detail months ago. In early November I talked about a rounding top and MarketWatch featured this chart of mine & kindly quoted my concerns about a major bearish crack to come:

MW 2015

And recall this was a time when there were still $SPX price targets of 2200-2325 for end of year 2015 floating about. The background article can be found here in: Symmetry.

And I’ve outlined the bearish evidence in my 2016 technical outlook as well.

I’m not stating all this to say “hey look I was right I’m oh so wonderful”. I’m pointing all this out to underscore what I’m about to say:

It’s easy to get bearish after price has dropped just as it is easy to get bullish with rising prices. That’s not necessarily helpful information, nor tradable.

And as hard as it was to be bearish in a price rising environment it is probably even harder now to get bullish. But the hardest trade is often the best trade.

And I’m telling you that I can’t be bearish here. Not at this very moment. Not after the price pendulum has swung so far in the direction I have raised concerns about.

Let me outline why:

2008 is the talk of the town at the moment and many charts make the case for a repeat of a 2008 repeat very easy. Too easy perhaps. After all we have been witnessing a complete break down in price leading with the confirmation of the rounding top concerns I had expressed back in early November. Here’s the same chart now:

SPX D

Internals have completely broken down:

XVG

And it cannot be overstated how serious this drop has been. In technical charts I’ve shared how historic some of these readings are. I highlight them here again and add a few to make a point:

HL2016 NDX

SPX50

NYA200

AAIIBB

The point: These are not readings consistent with a top, but rather a bottom. At least a temporary one.

As our members know there were two things that really bugged me about the 2015 summers lows: The fact that the first low in August was a circuit breaker low and not one of free market price discovery, and that the second low was not a lower low. Why did the second point bother me in particular? Because any serious lasting low in the past 20 years has been made with a lower low accompanied by a higher low in the RSI. In short: A positive divergence.

Not so in 2015. It  was a major missing piece.

Well guess what markets printed last week?

SPX weekly NYSI weekly

$DJW

That’s right. Lower lows, with higher lows on the RSI.

Not only that, but consider what the $DJIA just tagged:

DJIA Mella

A multi year trend line and the weekly 200MA.

Now, none of this guarantees that lows are in, but it tells me to be very cautious about buying into the doom and gloom scenario at this particular juncture.

I’m also not saying this is a happy bull market. Not saying this at all, but even the voices that are now drawing a comparison to 2008 need to acknowledge precedent, and that is this:

The 2008 bear market didn’t start in January, it started much later. In fact, it made its January low just about now:

Jan 2008

After an absolute miserable beginning in January we saw a bounce, a sizable bounce, followed by months of chop that had one goal: The close the early January gap and retag its 200 day moving average.

It took 5 months then, but they got it done, and THEN the real bear market began:

2008

I’m pointing this out because for all the bear market screaming there is an important element missing now: The crossing over of the big long term MA’s.

The haven’t yet crossed, but they will unless price recovers aggressively. But here too 2008 offers a lesson: The retagging of the MAs and the failure to cross over is what cemented the market’s fate then and the $RUT chart here highlights this issue very clearly:

RUTW

In summary: Markets are historically oversold and far disconnected from basic moving averages. Sentiment is in the toilet and almost 85% of stocks are below their 200MA. The pendulum has swung far in the bearish direction and if this is truly a bear market, then there’s another key ingredient missing so far: A bear market rally to rip everyone’s face off.

And so the base case here for me is this: Severe technical damage has been inflicted on this market and historical precedence, supported by technicals, suggests that a bounce into long term moving averages will unfold, albeit possibly in an extremely choppy environment. Such a reconnect may then coincide with long term moving averages crossing over and then targeting the pattern measured price moves we have outlined back in November:

SPX M

However, and I want to be super clear on this point: Just as last summer I was not entirely happy about the lows being in I now find a couple of things bothering me about the bear case:

A: It just seems too damn obvious right now and the boat is loaded bear. But perhaps that’s the contrarian in me.

B: M1 money supply. We’ve been watching this trend for years: A big jump in M1 money supply has invariably been a leading indicator that new highs were coming in the $SPX and January’s print not only marked a new high in M1 money supply, but was a massive jump back into trend:

M1

So alongside with all these positive divergences I am seeing I have to remain open to the possibility, as remote as it appears right now, that this all has been a giant and elaborate bear trap, the likes of which the world has seen before. When? The mid ’90s:

VIX SPX

Could we crash from here? Anything is possible at any moment and the daily destruction in the energy sector is awe-inspiring. But is it the most probable scenario?

I can’t help but be very skeptical about it. After all the damage has been done and while further downside cannot be excluded it is precisely the context of the current damage that gives me at least serious pause.

Crude is near major historical support and transports are farther outside their monthly Bollinger bands than ever before. And ever is a long time:

CL

TRANM

And on that note I’d like to point out that bearish trading in crude have taken on $AMZN like proportions. Here’s the weekly chart of $DWTI an inverse bearish ETF on crude:

DWTI

Now this may continue, but as we have just seen in FANG and Nasdaq, parabolic parties tend to come to a sudden end and if the bear case, at this juncture, is dependent on this chart continuing to rise, then I suppose nobody should be surprised if the pendulum has a sudden change of heart.

It in this context then, with new weekly lows coming last Friday, I do take note that money flow was actually positive into the carnage:

So perhaps, we’re not the only ones that started to look for the pendulum to swing back the other way. At least for a little while and perhaps into the key long term moving averages.

What happens then, especially if the January gap gets filled, will then be the dividing line between a bull market resuming or a full fledged bear really beginning.

Good luck everyone. As mentioned above we’ll keep sharing charts, but the strategic analysis and directional views will mostly be covered in the daily market brief.


Advertisements

Tagged as: , , , , , , , , , , , , , , , , , , , , , , , , ,

8 Responses »

  1. This is really well put and interesting, thanks for posting it. I’m bearish but the violence of the move has even caught me off guard.

  2. Excellent stuff. Sorry you are being ripped off by TMF Trades. 1st class turd.
    Keep up the excellent work. Mike

  3. Great content thanks. The only thing I can think of that no-one is expecting is new highs. Sure would surprise me.

  4. Thanks great history & analysis, fits with what I am doing this week.

  5. Your time frames are great, enough with the swing day traders. Thank you

  6. Great analysis. Thanks. In my own Bull and Bear analysis, inundated with overly bearish talking heads market sentiment, declining Bulls to Bears ratios, and more, I find many of my chart indicators giving more “contrarian bullish advice or warnings” that supports our observations, and your arguments, vis a vis the 2008 scenario as being “too easy.” Normally bearish indicators that would be suggesting “sell”, “SELL” or “SHORT”, are suggesting to take profits and cautioning about a “potential rally” to higher prices … or are “Out of Market.”

    This week should, and through the end of January, will set the tone for the first quarter, … and the rest of 2016.

  7. You DID presciently call the rounding top and drop. Great work, thank you. A bounce may be due as The Market likes to surprise the majority.

Trackbacks

  1. Recovery – NorthmanTrader

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

The material on this website is provided for informational purposes only, as of the date hereof, and is subject to change without notice and does not constitute investment advice.
Home | About | Disclaimer | Contact
Copyright © 2013-2017 NorthmanTrader
The materials on this website may not be suitable for all investors and are not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.