Market Analysis

Cat and Mouse Game

Note: Below is an excerpt of the Daily Market Brief issued to subscribers on Monday December 10, before market open. It outlines our technical and macro rationale for positioning long into weakness on a breakdown below October lows.


OMG, the noise, the uncertainty, the crash calls, the 1929 analogs, the scary stats and whatever else is noising up everybody’s twitter feeds.  According to some of the stuff I’ve seen the world is immediately coming to an end today. Black Monday, whatever else. Stop it. I’m tuning it all out.

NOBODY has a clue of what will happen next or where we’re going. Nobody. Everybody is guessing. And guess what? Classic market behavior frustrating the maximum amount of people a maximum amount of the time. In one week markets drop 3.5% the next they rally 4.5%, and then the following week they drop 4.5%. Yes, lots of volatility, lots of back and forth, it’s called chop. It’s a giant cat and mouse game at the moment.

Some facts: $DJIA and $SPX are flat on the year. Some sectors are down hard, and we remain in range:

As I’ve discussed at length there is downside risk and we want to be aware of the levels so we can execute against them.

As I stated on the feed last night my view remains to position long on weakness here for a tradable bottom to come.

There are only 2 full trading weeks left in the year and in my view we’ll see a tradable bottom between now and then. For all I know we could’ve already bottomed or we will make another scary low below 2600 this week. Can’t say. Yet.

Fact is bears keep failing to break the October lows so far. Now that may change, but at this point they’ve also had every excuse in the book and last night they failed again on futures open. So the bear trap case remains possible.

Indeed we actually filled the open $NDX gap below:

I may be the only bear on the planet who says this, but I’ll repeat: I’ve not seen evidence of bear markets emerging with a whole bunch of open gaps above, my view remains that most or all will eventually fill before the big bear market emerges perhaps into next year.

And yes I recognize we can and perhaps will drop into 2400. And perhaps it will happen next year, or even this week. I can’t say, but I can’t base my trade strategy around what could happen, but rather on the charts and levels in context of the environment we’re in.

People want to talk about 1929 and times such as these? Fine. 1929 was a crash, 1987 was a crash, but NONE were in December, they happened before, the lows were already in. We haven’t crashed, we’re flat on the year. In the US.

Bear market corrections have already taken place in many parts of the world:

And it looks likely the US will do the same at some point.

But because of all these large corrections in the world many of these indices are vastly oversold already. Take the $DAX:

The weekly RSI is at 30, first time it has hit this level in 7 years. Yes it can go lower still and I’ve outlined major support zones in the chart above, but this chart tells me to look to buy weakness not to short as $DAX could be setting up for a major rally.

Everything about Europe is bad right now. Italy, Brexit, growth:

And this is the environment the ECB wants to tighten its intervention program this week?

Really?

Look, I don’t envy Draghi here. He’s basically looking at a colossal policy failure here and he’s screwed either way. If he ends QE and has nothing else in his pocket Europe may enter a recession right when he retires next September. Not having raised rates once, still running negative interest rates and everything looks like hell. Is that to be his legacy? The dumbest central banker ever?

If he doesn’t end QE he looks the fool with no credibility having signaled the end of QE all this year and even just a couple of weeks ago.

“Whatever it takes” has been his mantra. Well, Mario, what does it take here? And that’s the question the ECB has to answer this week. So it will be a trigger either way, but I think it’s fair to say that a lot of bad news has been priced into Europeans stocks.

Which brings me to this Brexit disaster. In the UK everybody is sick to death of Brexit and the political circus and ineptitude is mind boggling. I have to assume the vote is a no. Will Theresa May launch a last ditch effort and fly to Brussels and try a Hail Mary? A Thatcher handbag moment as they call it? I can’t say. Fact is markets want visibility and certainty.

All of which tells me that while there is downside risk there’s also risk of a spark that lights a fire under these European markets and one is either in the move or not.

So things are bad and there’s lot of angst out there right now. In December.

Why keep raising the December point? Because even in the worst years (which this is not as key indices are flat on the year) even in the worst December years there’s a tradable bottom to come.

Here’s 1929 since everybody’s talking about it:

Cracked into November, bounced into early December and then another flush in December, bottomed on December 20th and then rallied 48% into April.

Here’s the December/January time frame for that 1929/1930 transition:

Tradable bottom in December.

1987: Early December weakness and then POW into January:

Tradable bottom.

2000: Oh look another bottom on December 20th and then POW into January.

Now December 20th, if that’s the date, is an eternity right now given the volatility in markets. And if Brexit fumbles, the ECB fumbles and more bad China news comes, then it’ll be up to the Fed to rescue markets on December 18/19 before December 21 OPEX. So yea perhaps it plays this way. But I won’t rely on this potential configuration, but I’m aware of it.

Fact is we’re still in wedge patterns and we have support levels below 2600 should we get another scare here:

I’ve mentioned $NYSE and $NDX:

But we’re also still in wedge patterns and they give us price levels to work with should we drop lower:

One factor we have to keep a close eye on is to see if bad news loses its effect and the downside contains itself or even produces unexpected upside.

We saw some of this on Friday with NYHILO:

It should’ve dropped, but it didn’t. And don’t forget the context, year end sees higher readings. Every year.

Also asset managers added onto weakness last week:

And internals improved on the low tag:

Bottomline: To me anyways, this is a giant cat and mouse game here into year end with lots of uncertainty and potential triggers this week and next.

Headlines will have a massive influence on price in this environment and some of these headlines will occur while US markets are closed setting us up for gap events.

I can’t predict the headlines nor the reaction to them, but my strategy here is clear: I’ll continue to look for a tradable bottom and manage entries with stops of course.

To me this week is potentially very decisive.

On Tuesday we have Brexit, on Thursday the ECB, both of which could be massive triggers on the European front. On the US front it’s the Fed that will be front and center the following week. Watch for more China headlines and look for the reaction to them. If bad news there no longer forces prices down that may be a sign that things will have been priced in for now. Also look for the impact of buyback announcements such as $FB and the stock reactions.

We’re approaching the magic mark-up period and things could change quickly.

So from my perch I remain very open minded here, but I also know what I’d rather be doing here, and that is to position long into weakness. Until I get that big counter rally that fills the open gaps above and brings optimism back and fewer crash calls. Then I’d be more interested in the short side.

And speaking of open gaps, wouldn’t this be a sneaky one to close the year on:

Cause who expects a 9% rally between now and year end? Nobody.

I’m not calling it, but it’s the least expected scenario at the moment.

Anyways, buckle in this week it’ll be a wild one. My main plan: Stay calm and dispassionate, ignore the noise and focus on levels and charts. One final note: This is the week before December OPEX:

It’s the OPEX week with the highest probability of a positive week in the year. And we’re currently pretty oversold and any new lows would make us even more oversold. Just saying. I’m looking for a tradable bottom.


Update December 12: $SPX dropped to 2583 on the day this was published and have rallied nearly a 100 handles in the 2 days since:


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