ES’ triangle has evolved into a flag patttern, piling on another 30 points of meltup thanks to VIX’s timely meltdown.
continued for members… (more…)
Category: Charts I’m Watching
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Killing Time
ADP payrolls beat this morning, while mortgage applications were off. The biggest economic data of the day/week as far as stocks are concerned, though, is EIA oil inventories.
Algos have been riding the reflation trade as indicated by WTI ever since April 2020. Downturns have been very few and far between, meaning significant equity corrections have been non-existent.
As we’ve expected, however, markets are finally focusing on the impact rising oil/gas prices have had on inflation, and that’s irritating the few remaining non-Fed bond investors to the point that a (very tiny) bit of price discovery has snuck back into the market.If the Fed should ever actually taper, the risk of a reunion between economic reality and bond yields will increase. And, that’s a scenario the Fed would very much like to avoid.
Meanwhile, the holding pattern continues.
OPEX issues again?continued for members… (more…)
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More Backtesting
It’s the third day in a row of backtesting a bearish Head & Shoulders Pattern. Futures are up moderately, but haven’t broken out despite the algo factors’ best efforts.
Remember, only a lasting breakout busts the pattern. Backtesting only postpones the inevitable.continued for members…
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Here be Dragons
Futures are off slightly as we enter a week with more questions than answers about the dangers which lie ahead.
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Buying the Dip?
Futures are up moderately this morning, bouncing 60 points from their midnight lows on a retreat in VIX. Note that it wasn’t a collapse – the usual response when a rally is resuming.
This lack of algo baiting occurred yesterday, too, when ES completed a Head & Shoulders Pattern and backtested it in a fashion that was reminiscent of the old days, when central bankers didn’t “fix” every little dip.
This highly unusual restraint suggests this dip shouldn’t be bought, but is the next stage of a scripted correction we warned about several weeks ago [see: Correction Watch.]Our downside case remains intact, with an even more bearish Head & Shoulders Pattern up next.
continued for members… (more…)
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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.continued for members… (more…)
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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?
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