Before you think I’m scare mongering I’m not. I may be retired as a bear but I can still read charts. And for weeks I’ve been harping about technical disconnects, record overbought readings and the need to reconnect technically. We finally saw some of this this week and in process we can see that markets have been acting extremely technically and because this is so it suggests that much more downside risk exists in this market.
Let me be clear, I’m not saying we can’t make new highs and perhaps we will as I outlined in the Rhymes of History but the writing is on the wall.
And I’ll use charts of the $DJIA to hone in on the point. Why do I call this scary $DJIA charts? Because the charts below suggest we have only barely begun to correct.
Let’s start with technical context. The recent rally in the $DJIA was unprecedented as it stretched on and on and people lost track of the fact that extreme disconnected readings bring about the snap back:
$DJIA quarterly chart
Price entirely outside the Bollinger band.
Historic sample size of this remaining the entire quarter like this: Zero. pic.twitter.com/x50rN3pkDh
— Sven Henrich (@NorthmanTrader) January 16, 2018
Those extreme RSI readings? Not bullish, but dangerous:
So you think markets were oversold in 2008 with a weekly RSI of 20?
Welcome to 2018: $DJIA weekly RSI now 91.93. pic.twitter.com/JnVWsHFtb6
— Sven Henrich (@NorthmanTrader) January 22, 2018
And snap back:
How technical is this market? Very.
The initial bounce zone this week came perfectly on the .382 fib off of the November 2016 election lows:
The highs recently? Perfectly on the 2.618 fib off of the 2009 lows:
Technicals matter and if markets can’t pull off new highs in the weeks/months ahead (intermittent rallies notwithstanding) then a larger corrective move has dire implications if you look at these fib levels:
Seems far fetched? Let’s have a look at some chart history and keep the basic fib levels in mind. 21,817 and 18,878.
Despite all the rah rah in January extreme RSI readings are actually not bullish long term. They may be bullish in the momentum game of the short term but eventually people get hurt as we just saw.
I reiterate: Extreme technical extensions demand reconnects. You can see it in the historic charts.
Here’s a $DJIA monthly charting dating back to 1900. We just printed the most extreme RSI reading ever and snapped back:
What do many of the historic RSI extensions have in common? Many eventually reconnected with key MAs following these extensions, either after new highs or immediately.
Currently the nearest monthly reconnect MAs reside at 20,562 for the 20MA and 18,854 for the monthly 50MA. 18,878 is the .382 fib I mentioned above.
Seems far fetched? Well, it’s also the breakout zone Mella mentioned on twitter:
A retest of the $DOW breakout is ‘just’ a little lower 😂 pic.twitter.com/QB20qvaBbB
— Mella (@Mrs_Northy) February 8, 2018
That’s called major technical confluence.
For additional consideration here is the long term quarterly chart:
Here too we can observe that significant technical extensions can have violent reactions that have produced larger reconnects in the past. In some cases the time people were the most bullish proved to be total disasters for markets in the periods there after.
The quarterly 5 EMA resides at 22950 and the quarterly 20MA at 18870. Monthly 50MA at 18854, 18878 being the .382 fib. I trust you notice the emerging theme.
But no worry, there’ s plenty of support before then.
Some of you may recall the $DJIA yearly chart I had put put suggesting a reconnect coming:
$DJIA is now 2659 points or 11.1% above its YEARLY Bollinger Band.
Hasn’t even touched it in 2018.
All history suggests a tag coming. pic.twitter.com/kLfp1I1cGQ
— Sven Henrich (@NorthmanTrader) January 24, 2018
We are much closer now:
Now that volatility and 2 way price discovery are back we have a much wider range of possibilities to consider. We will have rallies, we will have sell-offs, but all in context of larger structural technical patterns that strongly suggest this week was not the final word. It was the first word.
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Categories: Market Analysis