Market Analysis

The Breakdown

Below is an excerpt from today’s client Daily Market Brief. Given recent market volatility we thought it might be helpful to share some perspective publicly.

Begin Excerpt: 

I don’t want to overwhelm you guys with charts and speculations, although I do have quite a few charts to go through. I do want to focus on what’s ahead here and how we want to play this.

Before I do that though some quick points. Yesterday’s move was vicious, unrelenting selling for 8 hours straight and no support level or technical zone mattered. Straight to the 200MAs on $SPX and $NDX. Absolutely relentless. And there was no apparent trigger other than the technical warnings signs we’ve been talking about at length. The 2820 zone did not surprise as we had that in our risk view for yesterday. We would’ve expected a technical bounce from here, but it didn’t happen. Margin selling came, relentless liquidation and no buyers.

And quickly we saw what happens when the machines reprogrammed. While that final hour move surprised, the larger aspect of the move didn’t and shouldn’t have. We’ve been talking about the breakdown risk at length and you all have seen the various charts by Mella and I that have pointed out the risk zones:


The question was never the if, but the when and the how.

Well now we know:

We not only hit the daily 200MA in overnight, but also the weekly 50MA:

All of this is massive confluence support and I suspect will be defended today, but anything can happen and we need to be aware of that.

Massive technical damage has been done to this market. And I don’t want to speculate now whether this is the end of the bull market, although I can argue the case. Nor do I want to speculate whether we are making a major bottom here, which I could also argue. There will be time to focus on that later.

What I want to focus on today is strategy for the here and now and recognition of the environment.

Fact is major trend lines have broken while others have not:

The oversold readings we’ve talked about recently have taken on epic proportions in some cases.

$NYAD RSI the most oversold since 2008:

$NYAD itself showed a capitulation washout yesterday:

Several index charts hit RSI readings on the daily that can only be described as rare:



What do Brexit, the 2016 US election and the February 2018 correction all have in common?

A break to the 200MA with a major oversold daily RSI reading.


BUT note we also saw overnight flushes, i.e. the US election, that don’t show up in the cash chart. So tonight’s overnight weakness should also not surprise.

I find the chart above fascinating as it leaves the clear possibility that we are seeing a repeat there.

But, if we do see a repeat any bounce will meet major resistance ahead. The January highs are now resistance, as are the broken trend lines hence I can easily envision a scenario such as this:

Way too early to speculate, but I wanted to throw it out there and Mella has done similar last night.

There is still downside risk.

In fact, while $NYMO got hit hard last night it has room to go a bit lower today:

But it is at a point that has produced major rallies in the past.

And note internals are crushed.

89% of $NDX components are now below their 50MA:

And here too I have to say we knew this was coming. I’ve been posting this chart for weeks:

This too has room lower.

And so do the high/lows even though they are very low now:

And there are major concerns we all need to be aware of.

We’re right back at the 2009 trend line, key, key, key support:

If this breaks it’s all over for the bull market.

And look at the macro context:

Oh yes, look at that $TNX ratio i’ve been talking about all year:

It’s precarious.

Bulls need lower rates and higher prices to avert the breakdown here.

Key, key, key time. Will they save this bull market again for now or will it break down for good?

Frankly with such brutal oversold readings I’m hard pressed to see a sustained breakdown to occur in the here and now, but note yesterday’s flush occurred despite $TLT staying above its trend line:

Also key key key support and if it breaks? All bets are off.

So the interplay between bonds and stocks is critical and amazingly correlated.

Let’s talk volatility. The wedge we’ve been talking about for months has finally resolved to the upside:

Here too we see RSI readings consistent with a reversal to come.

But note how super clean the $VXX chart has been technically:

We could frankly see a straight run toward the upper trend line first, which brings it into the 40 zone. Or we see a retrace to the trend line first, i.e. the bounce scenario into OPEX.

Speaking of OPEX, it’s now Thursday the week before OPEX and we have new lows in overnight. That’s kind of the ideal scenario we’ve been talking about.

My take: We need to see a major rally today to close above the 2016 trend line and above the 200MA and ideally above 2800+. If we do not, we have ugly October risk into Friday and then Monday.

You know the really ugly kind, the 1987 scenario kind we’ve been talking about:

I don’t want to scare anybody, but we all need to be aware of the risks.

After all the buyers of the past several months are now under water:

I guess they bought every dip. Well done.

We are now back at the June highs and there’s an open gap on $SPY at 274.

$DJIA is very close to its channel trend line:

Negative divergence on the daily on new highs. Yes, that was the 1987 scenario. And it’s October.

And we have this:

And this is the risk here: That we flush straight to 2600. That’s another 150 handles or 5% from current overnight lows.

It would be a massive buy, but ugly to see unfold.

Trade Plan:

End Excerpt

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Categories: Market Analysis

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