Weekly Market Brief

Level Watch

Oh dear. Whatever happened to the record earnings growth story that was supposed to propel markets to ever new highs? Company after company is being taken out back and shot. Retail, banks, tech, the causality list and their reasons keep expanding. $NVDA, $WMT, $GE, $AAPL, $GS, I could keep going. Long forgotten are the cheery headlines of $1 trillion market cap companies. Things are ugly out there.

The Fed crying continued unabated last week with Ray Dalio joining the chorus seemingly advocating the Fed make asset prices the primary mandate as opposed to the economy. With real rates still negative the absurdity of the parade reveals an ugly truth: Bears have been right all along. The entire bull market was based on cheap money and the eventual unwind will be miserable as corporate, government and consumer debt levels keep rising to ever higher levels and the Fed’s historic slow rate rising attempts have already seem to have hit the proverbial wall. Tax cuts have not paid for themselves, deficits are ballooning, and earnings growth comparisons will lag in 2019, global growth is slowing and the temporary 2018 spike in US GDP is already settling back into a 2.x% range with no permanent upward kick in sight.

So here we are with 6 weeks left in the year and the bull case has markedly shifted from earnings to 3 principle drivers of hope:

A. Get the Fed to stop its rate hike in December.

B. Seasonality/Buybacks/Markups

C. Get the president to cave and get a trade deal with China before the end for year.

On the latter point: The running joke in markets is now the predictability with which teasing positive China trade headlines are juicing futures at least for a few minutes following downside action in markets. The president, self imposed via twitter no less, has made market levels a measure of success for his presidency.

I’ve long stated that market levels will ultimately force a resolution in trade wars. That all worked well as long as it was China and Europe getting hammered, but now that US markets are increasingly under pressure for the same reason the motivation to get things solved is increasingly shifting toward Trump.

And if the president wants a strong market to end the year then getting positive news in the next few weeks (think G20 meeting) is becoming mission critical.

And there is the recipe really for the bull case into December: China trade deal resolution, perhaps the Fed pausing its rate hike, and then seasonality can kick in with full force as funds are badly lagging performance this year.

Without any such positive triggers bulls risk tax loss selling and a break of major bull trends which are still hanging on for dear life at this precise moment in time:


There are 2 weeks left to save these trends again this month. Speaking for bulls is traditional positive seasonality during low volume Thanksgiving (except Monday) and then month end markups. However political event risk is also hanging over these markets and will throughout the rest of the year.

As we remain in range it’s then critical for participants to keep an eye on levels and signals.

Let’s review some key charts.

Whats the state of the inverse patterns we discussed last weekend and in Raging Bull Patterns?

Shaken and stirred is probably the best answer.

Last week indeed produced the large retrace we’ve been expecting:

While the 2680 gap was part of our risk profile $SPX dipped 11 handles lower below the .236 fib on an intra-day basis before ripping higher closing the week back above the .382 fib.

Fake low and go? Possible, but the pattern is now very shaky and possibly invalidated.

I say possibly, because the pattern still conceivably exists on other charts:

There’s little room for error here and bulls need a big rally fast to recapture the big MAs or this bull pattern constellation is history.

Let’s not forget that bulls have so far failed to recapture the 200MA and there’s danger in that the $VIX could be forming a bull flag pattern:

Note also that $SPX remains below its broken 2016 trend line. Not a good spot for bulls to be in.

It’s a mixed signal on the volatility front. One could argue a topping pattern and/or a bull flag.

The volatility pattern in the underlying $RUT volatility index sends a cleaner message:

That of a heads & shoulders pattern which would suggest a coming journey toward its current death cross on the 50 and 200MAs. MA reconnects happen and $RUT hasn’t touched its 50MA since early October.

Potentially also bullish here is the $NDX chart as outlined in Mission: Gap fills:

4 unfilled gaps to the upside with a potential smaller inverse H&S pattern.

Supporting such a move toward gap fills could be the very same beaten tech stocks that are now clinging to key support and are getting very oversold.


$AAPL: Saved its weekly 50MA and trend line by Friday’s close:

$NVDA: New it’s .5 fib and weekly oversold:

$FB: well, either rally now or it’s lights out for the support trend:

The flip side is of course that these stocks lose support and then things could get ugly quickly.

After all $NDX is still barely hanging onto its quarterly 5 EMA a support:

And its yearly 5 EMA is still 20% lower in 2018:

And don’t anyone kid themselves: This reconnect is coming, either this year or next. Next would be better for bulls as the MA will be higher by then.

Also be clear: A break of support zones would invite this lower risk zone:

So it’s a precarious, uncertain time here.

What are the signal charts telling us? Actually they are sending a bit of a mysterious message. In fact, on some of these charts last week’s 140+ handle drop never happened.

No really, one couldn’t tell we dropped:

$NYMO never even went negative which perhaps sends the polar opposite message form the September highs. Recall between September and October $NYMO never once went positive making the new market highs then highly suspect. Does the lack of negative readings now make last week’s sell-off suspect? One has to wonder.

Especially considering the $NYSI stochastic:

It hasn’t registered a single overbought reading since the summer and it’s overdue and, perhaps most encouraging for bulls: It tends to find a way to get to overbought at some point before the end of a given year. Yay for seasonality I guess.

Yet still concerning for bulls is $NYAD as it continues to play its 2008 pattern:

And that’s the concern into month end: If $SPX invalidates the bullish structures and reverts back to a bear flag then the lower risk zone is in full play and with it the break of the 2009 bull trend.

The task for bulls this coming week is clear: Stay above 2700 and recapture the daily 200MA and the weekly 50MA and, better yet, recapture the monthly 5EMA before month end:

Recapture these levels and defend them, then the year end rally case has merits and targets multiple open gaps above. Without getting above these levels the lower risk zone remains part of the playbook before year end, especially on a confirmed break below last week’s lows.

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Categories: Weekly Market Brief

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