Markets – Macro – Technicals

Welcome to the Danger Zone

Welcome to the danger zone: 2484 $SPX. We hit it this week. If you are a long time reader you know this is a hot zone in markets I’ve been talking about for a long time and now that we have reached this area I would be amiss to not talk about it. And I will outline some charts below that may prove to be perhaps nothing, but they may also prove to be critical in what will happen with markets next.

Don’t get me wrong, I’m not a top caller even though I get accused of it in one form or another on a regular basis. Yes I am macro bearish and I have outlined my analysis in quite extensive detail on this site and on twitter. Just this week I published my latest piece in Fool’s Gold and if you haven’t read it I highly encourage you to do so.

But let’s got to charts:

Just to get everyone on the same page quickly:

In April 2016, following the larger correction in Jan/Feb 2016 and the bounce that followed I talked about a large technical move setting up in $SPX. I called it The Big Move and I wrote:

“..in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:”

SPX GAAP Money supply

I concluded then by stating:

“The bottom line: This is a big battle for control. On the one hand fundamentals and technicals suggest a breakdown of size may well be in the cards, while on the other hand, continued “highly accommodative” central bank policies coupled with perhaps an incremental relative improvement in earnings to come may result in a breakout making stocks even more expensive than they are now, the classic blow-off top scenario if you will. Clarity will only emerge once the range is decisively broken in either direction.

Whoever wins this battle gets the big move. 324 handles.”

We know what happened since then. More central bank intervention than ever couple with a bounce in earnings and M1 money supply continuing to expand relentlessly along with market prices:

In March this year I added to the technical extension risk argument by offering this chart in The Final Wave:

“This price extension risk still remains. Indeed a similar exercise using the 2007 highs and 2009 lows as a range yields a target slightly higher:”

This week we got to within 1 handle of this technical target zone. Could it have been this simple? I can’t say, but I can observe what has happened:

We got to 2484 and we rejected. Not massively, but we immediately rejected when we got to this price which tells me it is relevant. It means something to this market.

Also of note is that the market appears apprehensive about getting to this price zone. We can all see it:

Now this is where it gets interesting. Note this:

A quick price expansion to new highs, then sudden indecision, an exhaustion/ rejection move followed by an inside day.

Why is this of note? Well, coincidentally perhaps, or not, this is how 2 massive major tops played out before.

Check it out:

2007:

Sudden move higher, exhaustion/rejection candle followed by an inside day.

2000:

Sudden move higher, exhaustion/rejection candle followed by an inside day.

I trust you see a pattern here. History does not repeat, but it rhymes they say.

Nobody can call tops in advance, nor should anyone as odds are you look like a fool in the process.

But here is what I can say with data backing me up:

We’ve reached the 2007 -2009 range price extension zone, or at least got within 1 handle. It’s of course always possible I got my math wrong and I was off by 1 handle 🙂 And, as you saw, we just had a quick run up, followed by an exhaustion/rejection candle followed by an inside day.

Perhaps it all means nothing and we keep rallying. The central bank liquidity machine is continuing unabated after all.

But take all the information above in context. We are here:

Based on long standing technical targets we have entered the danger zone, and we have done so with record low volatility, unprecedented in all of market history.

My take: If markets can’t make new highs soon and instead revert lower toward the 100MA at least or lower (currently 2402) over the course of the next few days or weeks then markets may indeed follow a familiar and historical script.

And if so, then everything changes.

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10 Responses »

  1. Fascinating… I also think we’re very near a top…maybe near another 1987 event. It feels like the meltup in 1987. But a series of declines haven’t even started. That said, I’m pared down to less than 10% (defensive) equity exposure & plenty of bond exposure. The mkt is dangerous here. Something’s up, but I’m not a great technician like you.

  2. Well done sir!!

  3. Seems 2474 was the freak out level today.

  4. With a price/sales ratio in unchartered territory exceeding 2 and sales growth pretty anemicand themarket trading at over 3 standard deviations above the mean, a correction is very near.

  5. Reblogged this on Rajveer on Markets and commented:
    Great Post

Trackbacks

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  5. Slutter aktiefesten med et brag? Nervøsiteten breder sig. - Daytrader.dk

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