Market Analysis

Megadeath

Reports of the demise of the Megaphone may be greatly exaggerated.

Last week $SPX exceeded the upper trend line of the Megaphone pattern and calls of the pattern’s death have been plentiful since then. But is the pattern truly invalidated?

Since the summer I’ve state clearly: For bulls to convince they need to break above the trend line, then successfully retest the trend line and then they can move onto the melt-up move if that’s what they want to do.

Well, price has clearly moved about the trend line:

Now you can blame/credit central bank intervention all you want, but reality is price moved above it. But does this confirm the breakout?

From my perch the answer is no as no retest has taken place yet, and without such a successful retest risk remains that the breakout will prove to be false.

And let me throw in another wrinkle here that’s quite eye opening: If you look at the market through a larger lens, i.e. the entire market, then the megaphone trend line has not been exceeded nor even quite tagged yet.

Here’s the $VTI the overall market ETF:

The Fed’s liquidity interventions since September and October may have sparked an aggressive, steep rally to exceed the July highs by 2% (so far), but according to the larger market the megaphone pattern is still quite alive and reports of its demise may be greatly exaggerated.

And it is right here in this moment in time that $VIX short positioning has taken on record proportions, exceeding even the previous record short right at the January 2018 highs right before holders of the doomed $XIV product got massacred as $VIX exploded higher:

Shorting the $VIX has been a regular occurrence during all rallies to new highs, even this July as $SPX reached 3028, and then came the $VIX rip that was also advertised by the charts in advance.

The pattern repeats the same volatility compression to extremes as $SPX pursues a tight channel structure, then a positive divergence forms on $VIX, people getting bullish and then rug pull. I submit the construct in the charts is very similar now compared to July:

As I outlined in Melt-up: “In my view the $VIX has a coming appointment with the 17 level. The nature of that appointment may well decide everything”.

The firepower that is being built in short $VIX positions may certainly suggest that a real risk off $VIX spike could also easily exceed these levels.

With many participants celebrating the demise of the megaphone pattern they are doing so with $VTI not yet having exceeded the upper trend line and record short $VIX positioning in place. Perhaps it is not the megaphone that will experience megadeath, perhaps it will be complacent positioning.

It’s too early to tell and the jury remains out, but the charts clearly highlight coming volatility risk.


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Categories: Market Analysis

15 replies »

  1. a post on another site a few days ago… Currently, the Buffett Indicator, which is the ratio of the total market capitalization over gross domestic product, is over 145 percent. A fairly valued market is a ratio somewhere between 75 and 90 percent. Anything above 115 percent is considered significantly over valued. The Buffett Indicator has only been higher two times: in September of last year, when it hit 146 just prior to the S&P 500’s 20 percent purge; and in March 2000, when it hit 148 just before the S&P 500 collapsed 49 percent. For perspective, the Buffett Indicator only registered 110 in September 2007, in advance of the S&P 500 crashing 56 percent. What does all this mean? Nothing. We are still at the mercy of Mr. Market. Shorts will begin to make money when Mr. Market says so and no sooner.

    so I decided to check 1929…GNP then 85.7B and total market value 87B

  2. Approximately 70% of breakouts and breakdowns retrace to the breakout or breakdown area. That said I agree that fundamentals don’t support an extended up move but the fed will support the 200 DMA at all costs.

  3. Fear not Sven, our stable genius leader has spoken today so sit back and chill, and break out those S&P 5,000 hats as it is time to par-take of more free, and soon to be unlimited NIRP fiat money from the magic money tree!

    “Gimme sum of thatz Monez!” (November 12, 2019, Dear Leader, BIG hands). Very prophetic as soon voters will be chanting this same quote at the 2020 election polling booths all across America—-> “Gimme sum of thatz MMTzzzzz”!

    Cut and pasted below:

    “We are actively competing with nations who openly cut interest rates so that now many are actually getting paid when they pay off their loan, known as negative interest,” he said. “Who ever heard of such a thing?”

    “Give me some of that,” he said. “Give me some of that money. I want some of that money.”

    P.S. Josh – dude, chill as S&P 5,000 soon enough (followed by S&P 1,500 as beggars can’t be choosers). Then we can all be soooo rich and happy, just like our dear leader! I mean really, what can/t free, unlimited money not fix??? Just ask the fed in 2021 as by then I am betting they have a slightly different opinion…

  4. So… at what point will you admit you’re wrong, Sven? A breakout that goes 1000 points up and never retests is pretty much confirmed. How about 500 points? 100? It’s 40 plus up now. Tell us where you think it no longer needs that retest. Because right now, it looks like you and your ‘golden megatrumpet’ or whatever are up the creek without a paddle.

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