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2018 Corrective Risk Zones

Some may consider the analysis below a fruitless exercise in this relentless tape higher, but I’m outlining some technical corrective risk zones for when the tape turns. I’ll keep this simple and focus on specific technical pivots/triggers. This is different from specific levels although the pivots will imply levels when the time comes.

As we are in a melt-up phase the levels will change but not the pivots and that’s an important differentiation.

And note I’m writing this in an environment during which have not seen a 5% correction for the longest time ever. An environment where some people imply that you’re stupid if you’re holding cash. Or at least you will feel stupid. Or you’re just plain dumb if you’re bearish. No really:

And don’t get me wrong, I’m not calling for a top here, after all I’ve outlined technical risk into the $SPX 3,000 zone per the 2018 Market Outlook. and for all I know we may just race straight towards there.

However I’ll outline some pivots that may prove useful for when the tide turns and a turn may come at any time. These pivots show the historic corrective risk zones and potential bounce zones in the weeks and months ahead.

Yesterday I posted this monthly chart:

The message: Markets have been doing some unusual things that hardly seem sustainable in a historic context. I’ve been talking about technical stretches before in Yearly Charts and Stretched and since then the stretches have only become more pronounced. Welcome to parabola land.

But let’s keep this simple and look at key pivots.

Here’ the updated yearly chart of the $SPX:

Note that price is entirely outside the yearly Bollinger Band. Hasn’t touched it once in 2018. Even in extremely bullish markets of the past, including 1999 and 2000, price tagged the upper yearly Bollinger Band. There is hence a high probability we will at least see a tag of the upper Bollinger band sometime in 2018. Currently it’s at 2629 or about 7.5% lower from here.

On a quarterly basis we can note that $SPX hasn’t touched its 5 EMA in over 4 quarters. Unprecedented:

A simple reconnect is hence highly likely. Currently this implies a 9% corrective move.

On the monthly chart we can note that $SPX has also not reconnected with its 5 EMA:

A basic monthly 5 EMA reconnect is 6% lower from here. A tag is very likely to occur during Q1.

Also note the monthly RSI on $SPX is as high as it was in 1996. This is really the only historical reference sample. That RSI stretch then produced a tag of the monthly 15MA. Currently a tag of the 15MA would imply a 13.5% correction.

On the weekly chart we can note that $SPX has not tagged its weekly 50MA since last August. The weekly 50MA is a regular pivot of $SPX:

Note the weekly 50MA currently sits at virtually the same level as the yearly upper Bollinger band making that price zone key confluence support. Again: About 7.5% lower from current levels.

Then of course we have the daily chart:

Several things to note: The entire price move in 2018 has so far seen the RSI above 70. Indeed there has been not even one single attempt to move below 70. There is no history that suggests this is sustainable. It is also of note that there hasn’t been a single RSI reading below 30 since the US election indicating how little price discovery there has been to the downside.

$SPX has not touched its daily 50MA since August. The 50MA is also a regular pivot and currently resides about 6% lower.

$SPX has not touched its daily 200MA since the US election in November 2016. Currently it sits 13% above it and puts it squarely in the historic danger zone as discussed in Stretched. Reminder: At its peak in 2000 $SPX was 13.6% above its 200MA before it all fell apart.


I can’t predict whether all of these pivots will get hit in 2018, but frankly it wouldn’t surprise me either. Historically speaking odds are that several of these pivots will get tagged at some point in 2018 and they may present buying opportunities for rallies until this bubble exhausts itself. But this will have to be judged in context of the tap when it occurs.

And don’t think I’m the only one pointing out warning signs. The interest rate issue is real as I pointed out in Rising Interest Payments.

Others agree:

“Harvard University professor Kenneth Rogoff, who co-wrote the definitive history of the financial crisis, said there was already the potential for a rebound in inflation-adjusted interest rates given U.S. inflation will likely grow by 2 percent or more this year.

“If interest rates go up even modestly, halfway to their normal level, you will see a collapse in the stock market,” he said.

As Citigroup CEO Michael Corbat said on a Davos panel: “There is a numbness out there, there is an ambivalence out there that’s concerning,..when the next turn comes — and it will come — it’s likely to be more violent than it would otherwise be if we let some pressure off along the way.”

In other words: Corrective activity is healthy and would do this historically stretched market actually some good. Or the later pain will be much more intense.

We shall see, but at least I’ve outlined some risk zones you can be mindful of for when the time comes.

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