Daily Market Brief

Fog Monster

Note: This is the Daily Market Brief issued to clients on Monday March 5, 2018 before market open, outlining our market strategy and outlook for the coming week. I’m sharing it to highlight how markets can be approached analytically in context of uncertain market times and high volatility. Note: $SPX closed at 2786 on Friday.


The environment remains foggy and very much unclear. We bought the weakness last Friday and shorted volatility with the view to position for an OPEX rally in March. Opex weeks can be a mixed bag but are generally bullish, March in particular. Indeed it’s one of the most bullish OPEX weeks of the year as is the month of March in general.

The start to the month has been rough on bulls. Friday’s bounce off of the lows made sense to pursue and frankly, if markets follow the seasonal script here, ideally I’d like to do very little this and next week other than scale out along the way.

That would be my ideal scenario and then we could explore selling these markets again.

The flip side would be taking out Friday’s lows into the next level support which may well happens this week if we have a Thursday before OPEX low type of scenario. Still too early to say.

Last night we saw renewed weakness in global equity markets on the heels of the Italian elections and continued uncertainty in regards to tariffs. I can’t remember the last time an election anywhere has had any impact beyond a few hours. Think Brexit, think the US election, etc.

Surely enough we are already seeing a larger bounce off of the lows and I could argue we are playing an inverse on the $ES that could target the next fib levels around 2702/2718.

Indeed if you want to be bullish here you can envision a series of inverses to play something like this:

$DAX also made a new lows early on, again, on the positive daily divergence I pointed out on Friday:

Could this transform into a nasty heads- and shoulders? Very possibly so, and if it did this could suggest a nasty summer correction scenario for a 25% drop from the January highs:

Too early to tell, but it would fit with a sizable rally into March OPEX first and perhaps Fed meeting first for a right shoulder build.

$NIKK looks weak as well and Kuroda felt compelled to mention further easing as a possibility. For now the 200MA has held and price is finding support also at the .382 fib:

If these current levels break we have support at the spring/summer 2017 highs and the next fib zone.

Bottomline: Lots of technical danger signs out there and we’ll continue to have to be in team dynamic mode here and be flexible.

Supporting the argument of strength to come:

As I mentioned last week $NYSI remains very much oversold:

And The Fear and Greed technical indicator is at levels consistent with previous major lows:

Friday’s lows also took the % of stocks above the 50MA again to low levels setting us up for that potential higher low scenario:

Note the 55 middle zone that used to be support is now resistance.

Together all these charts make it tough to support new short positions at this stage. Rather, one could make the case that a very aggressive multi week rally could emerge.

And I submit, in context of the charts above, my fib chart from this weekend pointing to old highs may seem a lot less ridiculous:

We’ll see if this fib constellation will turn out to be a coincidence, but for now I have to regard the precision of the 1.618 level as something worth paying attention to, especially as the $ES seems to be carving out a specific roadmap based on fibs:

I’ve marked the pink box as our next level support should price roll-over altogether and this is the area I outlined last week.

Incidentally $RUT again saved its trend line last Friday:

And as long as this holds $RUT has room to move higher too.

So the bullish case is there despite all the shaky market action.

Having said all this: Without new highs (and even with new highs) these markets are walking on dangerous territory.

Take the recent $SPX range:

I hate to describe this as a diamond pattern as it looks a bit messy, but if it is, the price range out of this would be 340 handles. In either direction incidentally. On the bullish side that gives you 3212 and will have made this correction another major low consistent with the Fear/Greed readings.

The flip side is down of course and then 340 handles gets you something close to 2200 $SPX. That would be a 30% correction off of the highs and someone consistent with the $DAX chart I outlined earlier.

Hot summer in the city anyone?

Could fit with that speculative $VIX inverse drew on Friday:

$SPX 2200 could certainly support a $VIX of 65/70.

Frankly hard to imagine such a scenario BUT I could make the case for massive support at 2200 $SPX being that both the weekly 200MA and the .618 fib reside there:

Way too early to speculate on, but these are levels to keep in mind if these markers fall apart as the pattern range points squarely into major confluence support.

Also supporting for more weakness to come is simply this: What correction? I can’t see one on the quarterly chart can you?

The last down quarter was 2 years ago, all we got so far is a bounce off of the quarterly 5 EMA. So one could argue that hasn’t even been a correction yet.

Great, so now I’ve covered a price range between 2200 and 3200 on $SPX. How useful is this?

Well, for one it informs us to stay flexible here. Note on the daily chart the 50MA is now at 2736 which also coincides with the .618Fib of last week’s decline:

So I would expect this area to be major resistance on any rallies this week. Given these levels here then is an updated speculative version of how this could unfold if the lows hold and markets stabilize:

I don’t have a sell set-up here, but could imagine 2735/36 to offer a potential sell set-up as it also represents potential resistance in the diamond formation I mentioned:

Strategy: My plan is to do little other than book scales at key levels into 2735/36 if we get it and then decide if a sell-set up may avail itself. Remember I would also not be surprised to see the 2850 gap fill into OPEX if all this resolves hyper bullish so I want to remain patient here. This week we also have Draghi tell us why he can’t end QE or raise rates. No doubt the drop in European stocks since the reduction of QE has not gone unnoticed. Other risk factors remain political either regarding tariffs or surprise announcements.

We booked 1 scale each on the big ramp on Friday. As I’m writing this all signs of overnight weakness have disappeared which suits me fine of course. Make it bounce. Note there will be lots of resistance at the 2700 area and bulls will want to close above there.

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