pebblewriter

Month: September 2021

  • A Clear Path

    Futures are up modestly as we approach the open. The primary equity factors – currencies, risk and oil – have all confirmed a clear path to our downside targets as soon as next week.

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  • The Fed’s Interest Rate Dilemma

    As long as interest rates remain low, higher inflation – transitory or not – doesn’t concern the Fed much. Given the mountains of debt we’ve accumulated, any breakout in rates is quite concerning. So, investors are understandably nervous when they see the 10Y threaten to break out of a consolidation pattern.

    The Fed’s dilemma is that oil, the initial cause of the sharp rise in inflation, was also a significant cause of stocks rebounding.

    Algos love the reflation trade – to a point. When rates get too high, it typically means that oil has risen too high. The Fed needs both inflation and oil prices to level off or reverse here, which is why the market is correctly very nervous.

    Some might even remember October 2018 [see: Suddenly Interest Rates Matter] when rates threatened to break out of a very long term channel. They could only be corralled by a 45% decline in oil and the subsequent 21% decline in SPX.

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  • The Fed’s Mess

    We get yet another signal this morning that the Fed’s inflation generating activities have spun out of control. Despite the record setting pace of home price increases…

    …they’re still pumping $120 billion per month into markets. Madness.

    And, the algos which have made the whole operation hum are greedily eyeing a continuing spike in oil and gas prices. Yes, even more fuel for the inflationary fire.

    There is a way out, but the market won’t like it.

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  • Charts I’m Watching: Sep 27, 2021

    Futures are off 40 points from the overnight highs as we cruise into the last week of the quarter. Advanced Durable Goods for August surprised, posting a 1.8% increase vs 0.7% expected on strong growth in shipments and transportation in particular. Bottom line, nothing here to support a continuation of massive liquidity injections.

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  • Gold: Anatomy of a Rat’s Nest Chart

    Once in a while, charts are so crystal clear that we can see the future as easily as we can reflect on the past. Gold is not one of those charts. The zigs and zags come fast and furious and rarely correlate with anything happening in the real world. Witness the indifference this so-called inflation hedge has shown toward the highest inflation in 13 years.

    But, the charts have pointed out some excellent trading opportunities along the way – usually by highlighting trend changes (or continuation patterns) that offer strong directional hints.

    I thought it might be interesting to reflect on the use of channels. What do they tell us, and how can we use them to guide our trading?

    By the time we layer in all the trend lines, Fibonacci levels, moving averages, etc. charts can start to take on a rat’s nest look.

    But, if we strip away some of those things, the channels tell a very compelling story. GC’s long-term chart, for instance, starts with a long, pretty well-formed channel. It did a reasonably good job of guiding prices from the late 1990s until 2014.

    When it broke down in late 2014, it was a clear signal that the long-term trend had given up the ghost.

    We can see that the breakdown followed a pretty clear trend lower, marked by the red channel below. When GC rallied out of that falling red channel – a clear buy signal – we were able to construct a less bearish falling purple channel that guided prices for several more years. When GC reached the bottom of that channel, it accurately signaled a good buying opportunity. That signaled was reinforced when, in 2019, GC broke out of it. Once a few parallel highs and lows were established, we had a rising channel once again. But, GC broke out of that rising channel, requiring a more aggressive one. We added the rising purple channel to accommodate it……and expanded the red channel to make room for the new highs.Although it’s a little early to say with any certainty, the rising purple channel is threatening to break down. It obviously sets up a backtest of the rising red channel’s midline (the dashed red line.) If the two of them are breached, it would be a very bearish signal – particularly in light of the drop through the 200-DMA.

    Put it all together, throw in some trend lines and other chart patterns, and we get a pretty clear picture that GC is on the verge of a breakdown. The chart doesn’t necessarily tell us which way it will ultimately go, just that we’re at an important juncture – very useful information indeed.The factors have been busy overnight, seemingly in quarter-end mode to prompt a bullish run for the barn. Will it be enough?continued for members… (more…)

  • Powell Doesn’t Disappoint

    Futures nailed our 4424 target overnight. Most will attribute it to Powell’s (completely unsurprising) resolve to support the economy the stock market. But, we know that the algos were spurred into action by VIX’s drop back into the falling channel from Mar 2020 and its dip below its 200-DMA.

    Remember, it ain’t over till it’s over. Follow this headfake at your own peril.

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  • The Reckoning

    The Fed saw the current wave of inflation coming. After all, they created it, fed it, and cheered it on as it enriched investors while threatening the finances of everyone else. Those few who questioned their actions were assuaged with economics doublespeak, assured that this new inflation policy was more logical, that inflation was transitory, and that the economy/market was doing so well that everything must be just fine.

    Anyone who puts gas in their car or buys groceries knows better. When the stimulus payments and enhanced unemployment benefits ran out, consumers hit a wall. We’ve seen the proof in retail sales and consumer sentiment.Anyone buying a used car, leasing an apartment or contemplating buying a house knows it too. Prices have soared, leaving an entire generation with little hope of ever owning a home.

    It’s just as bad or even worse all over the world, as central banks everywhere have embraced what was billed as the ZIRP free lunch. To characterize it as such, however, gives them too much credit.

    More accurately, it’s a transfer of wealth: from the lower and middle class to the wealthy; from savers to spendthrifts; from the prudent to the speculator. At best, it pulled price appreciation and profits forward. At worst, it has created a price bubble that exceeds the worst in recent history.

    In trying to insulate the markets from business cycles and the effects of a global pandemic, central bankers have paradoxically increased the risk of a crash.  The Fed knows this, which makes today’s Fed meeting all the more important.

    Bulls are praying the Fed will extend and pretend. Bears are hoping Powell will cop to a monumental policy mistake and immediate tapering.

    Futures ramped higher overnight in typical pre-FOMC announcement fashion. Though ES has stalled at a backtest of the white channel, the bigger prize is a backtest of the broken yellow channel and the 10 and 50-day moving averages at 4424ish.

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  • This Changes Everything

    ES nailed our next downside target yesterday, bouncing exactly where it needed to in order to avoid a panic.But, there’s more to this downturn than meets the eye. And, it changes everything.

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  • Equities Plunge on Loss of Algo Support

    Futures reached our next downside target earlier this morning, the Fibonacci retracement at 4348 we added on Sep 9 [see: Just Don’t Call it a Taper.] ES is now off 4.6% since recent highs and 4% since our Correction Watch on Sep 8.

    The algo factors, which have propped up stocks for months, are positioned for further losses following their realization that a bounce at the 50-DMA is not guaranteed.

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  • Charts I’m Watching: Sep 17, 2021

    Welcome to another day of churn, with breakdowns averted and breakouts merely head fakes (at least so far) as we continue to play cat and mouse with the 50-DMA.

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