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Below is an excerpt of the Daily Market Brief From November 16, 2017 titled: Precision
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Daily Market Brief November 16, 2017:
Here’s what I said in Monday’s brief:
“However, if we get surprising downside this week with a $VIX spike I will likely close the $VX long on $SPX oversold readings with a view to re-enter following Thanksgiving. If a breaking of last week’s lows occurs this week then we look to scale out of other index shorts with a view to keep the $DJIA short as a swing position.”
This market remains stuck in a minimalistic range and we have to carefully navigate the signals here until things change.”
We stuck precisely to plan. We scaled out of index shorts and we closed the $VX long and yesterday’s premarket strength on the November contract was a gift to close out for now.
The $VIX chart trend line tag was as precise as things get from a technical perspective. With an RSI reading of over 75 it was a clear signal to lighten up and we did.
On November 8 I outlined a bounce scenario to hedge long on $RUT especially if we were to get a fib target hit:
Yesterday we got the tag:
The RSI got to 33 intra-day. On the cash chart the tag didn’t appear quite precise, but guess what? Perfection on the futures chart:
So you see markets continue to act very technically and of course the question now is was this it for the downside and how to play this going forward.
Firstly going back to the $VIX I have to admit how impressed I am by the continued precision of this chart:
This spike coming on the heels of higher lows suggests here is subtle strength building. If we want to see a change in this program with a view for an eventual breakout I would like to see these MAs finally holding as support and then produce a break above the trend line.
I.e. go back to the 200MA and then spike from there. That’s the script for everything changing in this market. The alternative is the $VIX goes back to the lower trend line and it’s all standard script from here. So this will be key to watch.
But also keep in mind we may be staring at a massive double bottom on the $VX futures chart:
We have 2 open gaps below and the script would demand that at least on of them fill or perhaps both. Makes it tough to be long $VX at this particular juncture. Hence I’d rather wait for perhaps that 200MA tag on $VIX before re-attempting a long on it.
On the signal front we knew things were getting oversold and it was the subject of my musings yesterday.
However, we still don’t have super extreme readings hence more downside is certainly possible:
With a $NYMO close yesterday of -55 I have to assume that the intraday readings were at least -60-65 yesterday. Again a sign to know not to press short, but scale out. This chart also makes it hard to justify any new short positions at this moment, rather to wait for a bounce to alleviate these oversold conditions knowing this thing can still drop lower.
That’s the same issue we have with $NYSI:
So the problem remains the same. We’re correcting, but indices are not dropping heavily.
Indeed the $DJIA finally connected with its weekly 5 EMA:
And, as you can see, it’s on its second weekly red candle. Oh the horror. No 3 red candles allowed since last year. Forget everything else, but this alone suggests next week will be an up week. I know it’s so mind numbing, but that’s the trend since even before the election.
Yet plenty charts suggest plenty more downside.
Take the $DAX as it followed through on the weekly reversal candle from last week:
We still haven’t touched the monthly 5 EMAs:
Volatility breaking out of the pattern?
Can’t say yet, but $SPX is rejecting at an interesting point:
2520 the monthly 5 EMA is now. We still have 2 weeks left in the month.
Here’s general seasonality:
Yea. Though to sell here with oversold reading and this seasonality staring us in the face.
But we haven’t corrected yet!!!
The $NDX is hardly down despite all the poor internals:
And $NASI remains on a sell signal:
In principle the $SPX chart suggests more downside, but here too we are on week 2 of red:
3 is the most bears ever get. And MAs are key pivot zones and trend lines key support zones.
This still remains the trend and this environment of current mini dips has not yet yielded a key fear/flush/capitulation moment. I still would love a flush toward the weekly 50MA in 2017.
Yesterday was not the moment of fear. Hardly any volume:
Everybody is still long:
So nothing has really changed. Yet.
I’m keeping my eye on the price for December once seasonality turns bad again:
On the daily chart we’re seeing some supply building and MAs are now resistance:
Note the elusive RSI 30 reading which we just had on the $RUT remains woefully lacking on $SPX.
The 3 open gaps above I suspect will see some filling this week.
If there is still to be a monthly 5 EMA tag in November we need to see violent rejection at these gap fills and then new lows:
The short window is closing into next week based on seasonality, unless something goes array in terms of an event.
Let’s talk tax cuts briefly then. You all know my views on this entire tax bill. I outlined why I think it’s a scam. It’s going to add trillions to the deficit, but it remains a key pivot in terms of passage or failure. If it fails my sense is markets will drop hard and maybe get us that big flush into year end.
I have no idea how the voting will go, BUT I will point out the following:
The base is solid and nothing will change that. Trump’s supporters love him no matter what. I won’t argue the point, but even Roy Moore accused of pedophilia and losing support among the Republican leadership to the point where even Ivanka Trump came out with a pointed statement:
“Trump weighed in on the scandal to the AP, saying: “There’s a special place in hell for people who prey on children. I’ve yet to see a valid explanation and I have no reason to doubt the victims’ accounts.”
But then: “She did not call for Moore to exit the race.” And Moore still has 39% support within the voting base:
“In the poll, reported by Politico, Democrat Doug Jones leads the former state supreme court judge with 51 percent support compared to 39 percent for Moore.”
The point: This tax vote will be a political calculation of incumbents. Does support crack or not? Some Republicans have been frank about what’s driving this:
“My donors are basically saying, ‘Get it done or don’t ever call me again,’ ” Collins replied.
Big money wants tax cuts. That’s not the base doing the talking. It’s the donor base talking. And hence it’s not a surprise that the core values of these tax cuts are geared to serve their interests.
However, since margins are thin, the above approval chart will also factor in with some Republicans who will face re-election in less than 12 months.
When push comes to shove they are loyal to their positions more than they are to Trump’s agenda. Lose 2 or 3 key votes and it ends like health care.
And visuals like this do not help:
Gotham City has fallen. pic.twitter.com/paIdutWdG6
— Sven Henrich (@NorthmanTrader) November 15, 2017
Bottomline: In my view this can still go either way and we need to keep a close eye on developments on that front. It’s immediate and it will be ongoing until December.
For the here and now:
My plan is to scale out of $RUT long on gap fills and 5 EMA tags and perhaps re-load on shorts on strength for a monthly 5 EMA reconnect play. But I may also simply wait until after Thanksgiving, not clear yet frankly. I’ll have to judge the action and technicals.
If we flush lower without these gap fills I will not add short, rather I will scale out further on remaining shorts on a monthly 5 EMA reconnect as signal charts will then be fully oversold and then trade long.
So it remains a balancing act here.
Overnight we’re seeing a gap up and they are testing the trend line:
Here again we see precision of technicals working.
That gives me higher confidence to enter and exit positions in this environment at points of technical confluence.
$ES still remains in a topping pattern. The standard program on $VIX suggests we may retest market highs or even make new market highs especially near the Thanksgiving holiday timeframe as volumes once again will dry up. A change in the program would see the $VIX find support at one of the key MAs and then burst higher to 20/21 gap fill finally. $ES 2505-2526 would then be key pivot points to watch. $VIX 20-21 may also see a burst of selling to just flush lower.
Remember these markets have not known fear for a long time and people will remain complacent until something changes. Sellers will be lower. Perhaps much lower. Which means the lower we get the more accelerated the selling would be setting up for a fear climax.
And that would then be the point I’d close my $DJIA swing short.
And we’re not anywhere near that point. Until then: We keep dancing with the technical signals as they occur with as much precision as we can muster.
Strategy: <Outlined daily in Daily Market Brief>.
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