The wait is almost over. Two weeks ago, I came across an analog that pointed to tomorrow, Jul 30 as a pivotal point in equities. Analogs don’t always play out of course. But, this one is important enough that it will tell us much about what to expect from equities, bonds, currencies and commodities — whichever way it breaks.
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In the opening scene of the wonderfully silly Scary Movie, the sultry heroine comes face to face with the masked killer. She glances down at an array of conveniently placed objects: a gun, two knives, a grenade and a banana. She ignores the weapons, of course, and grabs the banana.
I think the Fed is in a somewhat similar position. They could attack the global slowdown and join with competing central banks, all of which have taken monetary stimulus to preposterous extremes.
Or, they could stick to their congressional mandate of maximizing employment, stabilizing prices, and moderating long-term interest rates. To equity investors, it would be the equivalent of grabbing the banana: a choice that would almost certainly lead to the death of the ongoing meltup.
This morning’s Q1 GDP read only increases the difficulty of their choice. While many FOMC voters would no doubt prefer to thumb their nose at presidential interference, no one wants to be known as the one who pricked the equity bubble.
Our current analog suggests that whatever choice they make, investors will be disappointed.
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Draghi says he’s prepared to do even more (is there anything more than “whatever it takes?”) and the German 10Y continues to slump further into negative territory.
What did it accomplish, you might wonder? While obviously not changing the prognosis that the ECB will soon be scooping up everything not nailed down, it did manage to break DB above the TL that’s been in place since Jan 2018 (whether it will stay there is another matter.)
Meanwhile, the Fed’s task of justifying a rate cut just got a bit more complicated as durable goods strongly beat expectations.
Stocks aren’t likely to respond favorably, though there’s now a bit of a technical buffer in the 10-day moving averages.
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The good news for bulls is that ES/SPX broke through the latest straw man trend lines yesterday and have (more or less) backtested them. 
The bad news is that the Dow remains stuck below double overhead resistance and several Dow components feature charts that are anything but bullish.
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Many of the stocks and indices I follow are sitting right at resistance, as is ES this morning.
AAPL has reached our target at the top of its falling channel…
…DB is bumping up against the TL from Jan 2018…
…and BA is within striking distance of the channel top at which it failed yesterday.
With VIX having reversed yesterday’s breakout and slumped back below its SMA10, the writing is on the wall — but, ES hasn’t yet broken out. Why not?
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BA has just about reached our channel top target from Jul 3. From Algos to VIX:
BA’s [chart] indicates another interim bottom.
It has now bounced over 12% since our Jun 3 bottom call signaled by ES’s 2.24 tag and has nearly reached the top of the new, gentler falling purple channel, now at about 380. It’s an important test for the stock — boosted by a monumental PR and its on-again off-again stock repurchase plan.
Note that the current forecast page has been updated for all major charts including
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Thanks to everyone who attended our Boston CFA Society presentation on chart patterns and technical analysis. As promised, here are the slides used in the presentation. Please contact me with any questions.
Conditions continue to look good for our current analog officially kicking off in 7 sessions. VIX reversed (again) at the fan line off the May 9 highs and backtested an alternate channel bottom — nudging ES higher after a fairly ugly Wednesday.
Oil and gas are closing in on our next downside targets — confounding the “experts.” But, for now, futures are leaking higher and about to test the latest minor obstacle in hopes that the Fed will make everything better. Spoiler alert: it won’t.
Speaking of spoilers…DB has punted on its latest opportunity to break out.
And, BA somehow continues to remain aloft. The real test would be at the purple channel top. Note that it still “owes” us a dip to 325.42.
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First, a confession. In 2004 I sat next to a guy at a Sundance Film Fesitval screening who was very excited about his company that would someday be able to play movies on your computer or even your cell phone. “Why won’t this guy shut up?” I asked myself as I scanned the theater for an empty chair.
The “guy,” of course, was Reed Hastings. At the time, they were barely profitable, having just posted their first net profit ever (a whopping $7 million in 2003.) The stock was hovering around $5/share.
I couldn’t, for the life of me, figure out how they’d ever compete against Blockbuster — which had turned down an offer to acquire the company for $50 million a few years earlier.
The 2004 annual report cover, to the left, illustrated the problem. Why wait for a movie to arrive in the mail when you could run down to the local Blockbuster and grab a copy (along with some tasty Goobers) right now?
Reed was obviously on to something and soon figured out online delivery — though he still hasn’t cracked the eGoober challenge. A $10,000 investment in the common at that time would be worth around $1 million now. Live and learn, right?
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The stock is under pressure this morning as subscriber growth fell short of Street expectations and the company’s guidance. But, I’ll leave that to my fundamental brethren to suss out. My concern is that the stock will test critical support.
Last year we took a look at the chart and noted that at 400.48, it looked particularly vulnerable. From Netflix: Watch It! on July 16, 2018:
A quick glance at NFLX’s daily chart shows it has significant downside potential. The most obvious downside target is the 100-DMA at 338.73. But, the 200-DMA is approaching the white channel midline and should cross it at around 298-300 on or about August 6. It makes for a nice downside target if the SMA100 doesn’t hold. Should the SMA200 and channel midline fail, the bottom of the white channel is currently around 200 and (obviously) rising.
The stock soon tested then failed at the 100-DMA, but bounced just before reaching the midline and popped out of the falling white channel. It thus postponed the midline/200-DMA test until October 11 where it bounced yet again before plunging through to the channel bottom which, by then, was up to 230.
There are a lot of things that could happen to the stock, which has traded as low as 313 in after-hours. But, the critical level to watch is 295-300 where it would drop through the 200-DMA and test the channel bottom as well as backtest the broadening wedge (aka megaphone pattern.)
Anything lower would be very problematic for a stock which has been locked in the same rising channel for 6 1/2 years.
One note to those focused on the fundamentals. The observations I made last year still apply:
As an aside… I’ve been mystified as to the value ascribed to the company based on its ability to produce original content. What about the risk? Anyone who has worked in film or television can tell you that most productions don’t turn a profit.
I don’t want to get into production. There are passionate, talented filmmakers out there and I would pollute the craft.
Reed Hastings, Inc Magazine: Dec 1, 2005
Netflix has clearly hit some home runs with House of Cards, Stranger Things, etc. And, theoretically, producing content in-house can lower acquisition cost and diversify revenues.
But, extrapolating an unending string of popular and profitable productions is just plain silly. Some would say borrowing $1.8 billion to fund said productions is downright reckless.
Think New Line, which followed up the hugely successful Lord of the Rings trilogy with the expensive flop The Golden Compass. Investors would do well to remember that beta works in both directions.
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The conditions remain constructive for our analog. Both RB and CL have broken down and USDJPY is conspicuously not coming to the rescue. In fact, the only thing keeping SPX on the rise is VIX’s repeated threats to make new lows — threats that, so far, have been hollow.
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