Market Analysis

Perspective

Big flush yesterday on the Fed and trends are breaking down everywhere right ahead of the Christmas holiday. In light of the intense market action I want to give you a quick update on my macro and technical perspective ahead of the holidays.

Let’s first review what happened: Markets rallied hard into the Fed in hopes of reassurance and some caving or pausing, but markets got nothing but a rate hike, still further rate hikes into 2019 and QT on autopilot to boot and it was the term “autopilot” that was the final blow. Markets didn’t like that and then it was carnage. Total Fed tantrum by market children who wanted candy again and didn’t get it. Powell actually did the right thing. He was the adult that told the children off. No more candy today. He stood for Fed independence and resisted all political pressure. Finally a Fed Chair with a backbone. Powell after all has to deal with the consequences of a too loose for too long policy driven by Ben Bernanke and Janet Yellen. The Fed needs more ammunition for the next downturn, the balance sheet is still bloated and for the first time in a decade markets have to prove they can actually function without artificial stimulus. So far they are doing a bang up job. 🙄

So let’s be clear: The tax cut was the sugar high and now the entire bull market trend is looking to fall apart with a devastating bear market to come.

For now the bull market trend line looks shattered:

It’ll take a massive rally into year end to come back from this. The quarterly 5 EMA is at 2633 at the moment, and it would rise on a big rally so it may require a move into 2650/60 by the end of the year to recapture that one. A confirmed break implies we may eventually retrace to 2200 or 1800 or even 1544 the 2000/2007 highs. Too soon to tell.

The entire Trump tax rally is gone. Poof. Never happened. That’s what happens when you get cocky and start trade wars thinking you got all the cards. You don’t. The world is interconnected and if you start a fire next door you’re bound to get some fire damage yourself.

The ghosts of 2007 are all around us:

So it all looks horrible.

How devastating has this decline been? Check the $RUT, that quarterly candle is something else:

23.5% down from the highs, 2 years of buyers wiped out. Trump tax cut? Gone. Trump rally? Gone.

It goes to underscore a key point here: What we’re witnessing and experiencing here is historic and it’s defying almost all precedent. Markets flew too high and now we’re taking out the excess.

Does this mean the Dirty Rally case is off the table? Not at all. Recall I had outlined striking similarity to the year 2000 topping market which produced a low on December 21 which then proceeded on to a 10% rally into late January.

Here’s a comparison to the action now:

Some differences, but also some striking similarities. Analogs always have to be viewed with a healthy dose of caution and skepticism, but there’s no denying that the context is somewhat similar.

Fact is the analog was right all along and predicted new yearly lows for this week and we sure have them now.

Also recall I outlined downside risk until a bottom is confirmed:

Yesterday we’ve reached the yellow support line I had outlined and have bounced from there:

We still don’t have a confirmed low and hence that risk range into 2400 still applies until a confirmed low applies.

Indeed the consolidation range has broken down and it could target 2385:

And we also have that open gap at 2460:

This defines the immediate risk ranges. However there remain solid arguments in play as to why we may also see a confirmed bottom soon and perhaps are making a low today or tomorrow. Note the steep positive divergence in the chart above for one.

Also consider the following:

$RUT hit .5 fib support with the weekly RSI even lower than during the 2011 bottom. Its consolidation pattern has reached its target and it’s near key support, the 2017 lows.

$ES also hit a key fib level:

And note the 200MA is now 10% higher. This is a steep MA disconnect that suggests a reconnect effort will emerge.

Also note bullish falling wedges still applicable on $NDX and $ES:

$NDX:

All show positive divergences as does the $BPSPX the chart I highlighted in Dirty Rally.

It has now reached oversold readings consistent with the 2015 and 2016 lows.

Speaking of oversold, the banking sector RSI is now on a 19 read:

Summary: Devastating technical damage has been inflicted on these markets and this damage will haunt them in 2019. A confluence of factors is forming suggesting an aggressive counter rally is setting up into early 2019 with continued downside risk still until a low is confirmed. Then earnings reports in January, developments on trade wars and economic data will set the agenda for what is to come.

2019 will be a wild trading year. Thanks to my readers and twitter followers, your comments and interactions are much appreciated. I’ll post some updated charts in the weeks ahead including my 2019 market outlook in early January. I wish you all a happy and safe holiday season.


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