Market Analysis

Imbalance II

Oh the irony.

It was exactly a year ago today, December 23, 2018, when I made the case for a technical bullish reconnect of markets that had overshot to the downside.

Back then in Imbalance I said, among other things, this:

“As of now we have massive imbalances to the downside and these disconnects will cause an effort at a reconnect…Bears are now screaming for ever lower targets in December. Ignore the screaming. Focus on the technicals. Everybody chill. Imbalances don’t last.”

And now with this Q4 being the polar opposite to last year and its current party like it’s 1999 atmosphere I find myself in the same spot: Making a case for technical reversion first before the next bull/bear debate. And yes, I’ve been making the Sell Case earlier with recognition that the Fed induced liquidity program may well extend into Q1 2020 and this still applies. After all the Fed’s current liquidity interventions are unprecedented:

That said the technicals are screaming imbalance as they did exactly a year ago.

So I’ll share a few charts for your consideration.

First off, let me point out that the Q4 move here is not dissimilar to what we saw leading up to the January blow-off topping move:

As then this move here being driven by liquidity, tax cuts then, the Fed now.

A basic imbalance then, as in December last year and now: $SPX far disconnected from its 200 day moving average:

The January 2018 extreme being more extreme than now, the December 2018 extreme being sightly less than now. Given continued Fed liquidity a full reconnect may not be in the cards immediately, but a reversion to come despite.

But it’s more than MA disconnects.

As the year and quarter is coming to end worth watching some of the larger timeframes.

Here’s $SPX yearly:

There is not a single year where $SPX does not at some point reconnect with its upper Bollinger band. It will be higher in 2020, but that reconnect is coming. The 5 EMA, likely, but not a must.

Same on $NDX:

Same on $DJIA:

A big picture observation:

Despite all the rallying in 2019 the broken 2009 trend remains, well, broken. Go figure.

Money flow? Massive negative divergences on everything.

Open gaps below galore, take $DIA as an example:


These are mere examples, but they highlight a larger message: These markets are historically extended, especially considering thee moves are coming on multiple expansion pure in the hopes of re-inflation next year. This market is priced to perfection and beyond. It can ill afford any accidents.

Bulls can take comfort that there is no technical damage apparent as negative divergences, non confirming signals, fundamentals, earnings, nothing have mattered in Q4 as the Fed’s liquidity has overwhelmed everything once again. But the technical imbalances building are demanding a rebalance. The more extreme the imbalances the more violent the eventual rebalancing process.

In January 2018 11 weeks of rallying was taken away within 2 weeks into February. I submit this market is risking something similar to come. Now it may well be that the Fed’s liquidity program, scheduled to run into mid 2020, will make any such a move or similar an initial buy. After all the year 2000 script saw an initial 7% correction that was bought for new highs to come. Something which may well happen in Q1 2020 as well, especially if the Fed’s liquidity continuous to retain control. But be clear: A technical reversion of size will come. How deep, steep and fast this reversion will prove to be we will have to assess as it unfolds. But remember the market will seek balance technically. It did after last year’s imbalance to the downside, I expect the same coming from this year’s imbalance to the upside.

And so I finish this year’s imbalance view the same way I did last year’s, just in reverse:

As of now we have massive imbalances to the upside and these disconnects will cause an effort at a reconnect..Bulls are now screaming for ever higher targets. Ignore the screaming. Focus on the technicals. Everybody chill. Imbalances don’t last.

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Categories: Market Analysis

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