Weekly Market Brief

On the Cusp. Again.

For the third month in a row markets are on the cusp of breaking their bull market trends. And once again they need a magic rescue into month end to avoid such a break.

What if you have a license to rally and stocks sell anyways? Not a good sign. Last week I concluded:

Outlook: Last week’s massive rally and indicated further strength have so far supported the Bear Trap scenario. We’ll be reaching short term overbought readings into early December just ahead of traditional short term weaker seasonality. There likely will be some fade/retest trade opportunities. Indeed bulls need to avert a sell the news scenario. A renewed drop below 2700 would constitute a major warning sign for bulls. A drop below the October/November lows would fully open up the lower risk zone again”.

I think it’s fair to say bulls fumbled badly. Short term weak seasonality indeed made its presence felt in a historic way as stocks dropped nearly $1 trillion dollars in market value in just 4 days and $SPX dropped below 2700. But October lows have not been taken out either. Yet.

The bad news hits kept on coming. Hardly anybody believes Theresa May can pull off a miracle and get the Brexit deal passed next week and European stocks soured amidst further weakening economic data. US markets kept getting hit by unforced errors by the US administration’s continued bumbling efforts to explain what’s what in regards to China and the arrest of Huawei’s CFO seemed to contribute to a sudden futures plunge as future markets reopened following the George Bush funeral. To boot President Trump appears under increasing siege being implicated in multiple potential felonies in Friday’s SDNY and Mueller filings increasing event risk and the departure of his Chief of Staff announced over weekend adds to uncertainty on the political front. Bottomline: All gains from the previous week were again given back and traders find themselves in a wide and aggressive chop range:

What this chart shows: A battle field for control and neither side has still proven their case. It’s a nightmare for investor confidence, but it’s a dream for short term traders. You don’t need to catch every move, but if you can short some of the rips or ride some of the rips you’re doing well. These type of moves used to take months to unfold, now they’re happening in a matter of hours and days. Volatility is back.

Notable about this chart, the massive back and forth ranges aside: 1. All gaps since late October have gotten filled. Be it up gaps or down gaps algos are filling them all. 2. There is a potential positive divergence in play 3. This large range could now be considered a consolidation range and it may have implications of significance. An eventual breakout upside the could imply a targeted move of equal size in either direction. 2815-2603 = 212 handles. On the downside this implies a potential move to 2391 on $SPX, on the upside it implies a potential move toward 3027. Gee, thanks Sven so we can go either up or down? Yup, that’s currently the situation. But there is more nuance to all of this.

$SPX remains inside the larger range:

But $SPX has dropped below 2700 again and as I outlined this is major warning sign for bulls as now again, for the 3rd month in a row, markets are in desperate need for another magic save into month end to prevent a break of the bull market trend:

Be it the global market:

Or key US indices:

The timing is once again critical. Long gone is the yield scare as slowing growth data and technicals have once again dropped the 10 year yield away from its long term trend line as it has time and time again for decades:

…as $TLT has once again held its long term trend line as well:

The Fed has been desperate to keep sending dovish signals and the President himself, apparently obsessed with stock market levels, has been trying his dearest to sweet talk markets with tweets. With no avail on either count. Markets are ignoring the Fed and they choose to focus on the negative on China coming from Navarro who apparently plays the evil twin to Kudlow who is the go to guy for jawboning markets higher.

Markets are not buying it and every spike has been sold.

I’ve been highlighting the lower risk zone that could come into play if markets break the October lows and, given the range consolidation, I’ve expanded the risk zone lower:

Given that ominous $VIX pattern the risk range could certainly come into play quickly. If we break the October lows. And make no mistake: That weekly candle is awful looking.

The weekly 100MA, February lows, April lows, the .50 fib, the 2460 gap, the .618 fib and 2400 zone could all be target zones on a panic flush and a $VIX breakout implying a 9% risk zone to the downside.

So is the Bear Trap #2 case I raised this week dead? It sure looks like it at the moment. But not so fast.

Several considerations that may still work in favor of bulls here for year end. For one, the powers that be have made their preference clear: They want markets higher. The Fed has gotten the message but hasn’t found the formula. Trump clearly wants higher prices but he keeps sending Navarro in front of the cameras. He may have to decide quickly which one he wants as he clearly can’t have both. Markets want confidence and they don’t have any at the moment.

Can Theresa May deliver a surprise next week? It seems highly unlikely, but if she does or delivers something that markets like in form of a compromise offer Europe may decide to rally. Next week also ends the poor seasonality window for stocks and closely watched central bank meetings by the ECB and the FOMC will become front and center.

As bad as December has been so far the weakness fits inside the seasonal script. December OPEX week tends to be bullish, the Fed is also meeting that week and then it’s supposed traditional Santa rally time.

I’ve outlined the 2000 scenario before and I’ll highlight it again as the current chop situation is so incredibly similar:

Back then a quick dip to new lows was bought aggressively for a larger rally into January. But be clear: In that year markets topped and larger rallies proved further selling opportunities as the recession then began to unfold. Recession risk has been rising and the signs of a slowdown are abundant at this stage.

So don’t be surprised if new lows are ultimately bought aggressively for a final hurrah perhaps.

Remember bear markets, (if this is morphing into one) don’t move in one direction. They move violently in both directions and their rallies can be the most aggressive.

If we do break October lows there are actually a few charts that suggest imminent support below inside the lower risk range.

Take $NYSE as an example, a rather fascinating chart in its current configuration:

Note the positive RSI and MACD divergences are overtly similar to the 2015 and 2016 lows showing potential for double bottoms. Back then markets were of course showered by massive central bank interventions and abundant fresh new liquidity. We don’t have evidence to new liquidity entering markets at this stage buybacks aside. Indeed $FB announced a $9B buyback increase just on Friday evening and Credit Suisse is expected to announce one next week.

$NYSE has been an awful chart in 2018, never made new highs, broke major support and has now formed an interesting pattern with lows holding at a trend line going back to 2014. At the same time it has formed a support trend line in 2018 which is a bit lower and could provide support on new lows versus October. A key chart to watch from my perch.

We have a similar setup in $NDX:

This pink trend line dates all the way back to 2007. Remember monthly trend lines are not confirmed broken until month end, hence a quick dip below the 2009 trend line then finding support at the 2007 trend line setting up for a big bounce could avert the breakdown before month end. Break that 2009 trend line by month end, then all bets are off of course.

Speaking of $NDX: It remains inside its wedge:

That wedge also has room lower before the pattern is invalidated. Last week’s rally above was a failed breakout at this stage.

Friday’s new lows for December came on a positive divergence:

Hence $NYSE is not alone with a positive divergence. Indeed they are visible everywhere:

The brutalized banking sector:

Small caps:

Even in internals we see positive divergences:

None of this means lows are in, but as aggressive as last week’s sell-off was it produced some odd readings on Friday.

$NY High Lows actually improved:

Still sitting at 15 it remains at a historical low prior to a year end close:

Even 2007 and 2015 produced rallies to higher readings before year end.

We see a similar positive divergence in $US high/lows as they closed higher on Friday despite the weakness in markets:

These signs may mean nothing or they mean everything. It’s too early to tell, but should a surprise rally emerge know there were signs that supported a rally.

And bulls may have another chart to give hope and that is the structure of the $DIA, the $DJIA ETF, it looks very similar to the structure we saw earlier in the year:

Bottomline: These markets are in big trouble again. Defending the 2009 trend lines for a 3rd month in a row seems an unlikely feat. Triple bottoms are rare and clearly we see liquidation in markets and very rash price discovery.

Working perhaps in favor for bears here is that we still don’t see any real panic fear spike in the $VIX as the $SPX range looks increasingly like a bear flag:

So if you’re looking for a traditional fear bottom none is apparent yet. To not see one would be a bear trap as many are expecting it now. And a fear spike would likely break the bull market trends unless the support lines I outlined above can hold.

As it stands long term charts continue to strongly resemble the 2007 market topping structure:


$BKX vs $SPX:

Outlook: This coming week will likely be the defining moment for buyers and sellers. Sellers still haven’t been able to make new lows, but monthly trend lines are again at risk of breaking. Sellers need to break them this week and sustain a break below outlined support levels or risk getting run over by positive seasonality to come. Remember all headlines have turned negative for bulls, but still bears haven’t been able to capitalize other than chop inside the range. Buyers may need just one positive trigger to switch sentiment on a dime, but the proof would only come with a confirmed bottom which will require a weekly close back above the weekly 50MA which currently sits at 2742 $ES.

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