pebblewriter

Tag: analog

  • Analog Watch: May 13, 2022

    Friday the 13th – an inauspicious day to break a new analog!  With SPX nailing our downside target and futures breaking out of the falling wedge pattern yesterday, we’re off to the races.

    These things don’t always work out. But, when they do, it can be a career-making trading opportunity. The one which worked out absurdly well was back in 2011. The 22% correction played out almost exactly as forecast, with the vicious 11-day, 18% plunge starting on the very day and within 1 point of what the analog promised. You can read all about it HERE.

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  • The Big Picture: May 12, 2022

    SPX closed below important support yesterday, suggesting that the current leg down isn’t yet over. Indeed, things could get worse.continued for members… (more…)

  • Test Passed, So Far…

    ES spent 6 1/2 hours yesterday anguishing over the trend line/neckline we discussed.  When the Fed minutes came out, it even broke down a bit from the rising channel it had constructed overnight.  The breakdown seemed like it was sticking.  But, just after the close, WTI spiked and VIX dumped. That’s all it took to put ES back into bullish mode, prompting a 21-pt pop which fell apart overnight but is back in place as we approach the open. Meanwhile, VIX has constructed a little TL which could break down any minute and boost the algos if they should need help.  But, what if it holds?  (For the answer, see yesterday’s: This is a Test.)

    Should be a very interesting day.

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  • Put Up or Shut Up

    It’s now been almost a month since we posted our analog-based forecast [see: Analog Watch July 15.]  If it’s valid, we should see a sharp selloff over the next few days which ushers in 9-12 months of increased volatility and losses. From that post:

    Ideally, an analog provides exceptionally accurate forecasts of a very significant move. I think this could be one of those and that stocks are on the cusp of the biggest drop since the Great Financial Crisis.

    With currencies and VIX on board, all we need is for oil’s bounce to fizzle in order for the bears’ party to get started.Next up…lower lows?If it’s not valid, we’ll know very soon.

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  • Will This Time be Different?

    We would almost always expect a big bounce off SPX’s 200-day moving average. Despite yesterday’s dip below the 200-DMA, the index dutifully crept back above it in time for the close.  And, the futures are currently showing an 8-point gain.Yet, if an analog I’ve been watching and our yield curve model are correct, this bounce won’t last. Stocks could be sharply lower by Monday.

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  • Macro Factor Cycles and Regime Shifts

    Some time ago, I noticed that CL’s (WTI light sweet crude oil futures) three important tops since 2008 were almost the same number of days apart. This cycle certainly caught my eye.After tugging on that thread, I found a similar situation regarding CL’s lows. The 2001-2009 cycle was only 31 days longer than the 2009-2016 cycle — a 1.2% difference.

    This is exciting stuff for many reasons. In addition to supporting the fact that markets often move in cycles, it offers some very strong suggestions regarding financial markets over the next few years.

    I gave up on the Efficient Market Hypothesis about the time that central banks and other wealth-effect proponents began directly and indirectly propping up stock and bond prices in the wake of the Great Financial Crisis.

    The first few rounds of QE were effective — but expensive and difficult to fine tune.  There had to be a better way than throwing trillions of dollars into stocks and bonds.

    Since fundamental discretionary traders account for only 10% of trading volume, it turns out it is much easier and infinitely cheaper to “influence” the instruments (the tails) which signal the machines (the dogs) to buy stocks.

    The 90% of trading volume which is, in turn, driven by machines (indexers, ETFs, etc.) is only too happy to let the tail wag the dog. Since it typically drives stocks higher, very few investors complain.

     *  *  *

    I had traded in most of what I believed before 2007 for a mélange of chart patterns, harmonics, analogs and technical analysis. By mid-2011, it became apparent that patterns and cycles could be at least as valuable as fundamental economic data in forecasting markets.

    But, as machine-based trading gathered steam, these patterns often broke down.  In some cases, the patterns actually marked opportunities to force short covering by predatory algorithms — giving rise to such “strategies” as Buy the F-ing Dip.

    I devoted more effort to understanding algorithms and the factors they used to drive stock prices — a pursuit which has paid big dividends. Price movements in the factors themselves are much easier to anticipate if one knows how and when they’ll be utilized.  And, by accurately forecasting the factors, it is much easier to forecast the broader markets.

    We saw in 2018 what can happen when markets aren’t supported: an 11.8% plunge in February and a 20.2% nose-dive between October and December.  The latter decline so alarmed the market’s caretakers that the Fed backpedaled on its plans to normalize rates and the Treasury Secretary convened the Plunge Protection Team.

    Since then, stocks have recovered most of their losses, causing some participants to exclaim that the worst is over and we’re one trade deal press conference away from new highs.  Yet, many others see lingering cracks in the market’s veneer — cracks that presage new lows.  Which is more likely?  Can our new models offer any guidance?

    This post will attempt to elucidate the macro factors at work, how and when they are utilized to effect desired outcomes in the markets, and what they suggest about the next few years.

    continued for members…

    First, a quick review of the most influential factors: VIX, USDJPY and CL.

    VIX

    The chart below shows the obvious: VIX declines are strongly correlated with SPX advances.  I doubt that there’s an equity trading algorithm anywhere in the world that didn’t recognize this years ago.It wasn’t much of a surprise, then, when bearish events in VIX began to be engineered in order to prop up the stock market when it was distressed as well as to drive it higher.  At first, it was just a dip at the end of the day to propel stocks back into the green.

    Somewhere along the way, though, the dips became significant declines – often below significant trend lines, moving averages, or Fib levels.  The chart below shows how decisively the occasional spikes were hammered.  Plunges from VIX’s highs during this period were initially in service of allowing SPX to defend important Fib support at 1823. That worked so well that the same maneuver was used to rescue stocks from the shocks of Brexit and the US election in 2016.

    The US election was a watershed moment for VIX as a factor.  As it became evident that Trump was going to win the presidency, futures plummeted by 4.5%.  Yet, along the way, VIX started selling off.  It was hammered by 33% that night.  SPX actually closed in the green the following day.

    Who would sell downside protection in the midst of the sharpest downturn in over five years? It was akin to cancelling your homeowners policy as a tornado bears down on your house. The only explanation that makes any sense at all is that VIX was hammered in order to trigger algos to buy stocks.

    Everything changed following that particular rescue.  VIX broke below horizontal support, TL support and moving averages. Most notably, tags on the yellow channel bottom changed from once every year to two of every three days.

    VIX, long known as the “fear gauge,” had officially become a tool with which to prop up stocks.  It isn’t the only one — though it is the only one which is mostly free from economic consequences.

     

    USDJPY

    The yen carry trade hinges on a sustained drop in the value of the yen to drive stocks higher [see: The Yen Carry Trade Explained.]  It has been instrumental in two strategic moves and countless tactical moves over the past twenty years.

    A decline in the yen relative to the US dollar drives the USDJPY higher. The chart below shows the USDJPY and SPX moving in sync during two significant stretches — each of which culminated in an equity selloff.

    From SPX’s point of view…From USDJPY’s point of view…

    Unlike VIX, USDJPY can only rise so high before it causes problems.  If the yen becomes too cheap, Japanese inflation rises to a level (Japan imports much of its food and all of its oil) which pressures interest rates higher. CPI reached nearly 4% in 2014 as USDJPY broke out of its falling white channel.  With debt-to-GDP approaching 250%, Japan had a very strong incentive to ensure rates kept falling.

    Recall that in the wake of the 2011 Fukushima disaster Japan shut down all of its nuclear reactors and turned almost exclusively to oil and gas for power.  Oil had risen 345% since bottoming in 2009, meaning power costs soared.

    Soaring debt and inflation is a bad combination. If the USDJPY was going to break out of its falling channel and drive stocks any higher, something had to give.  That something was oil. Oil began its 76% crash on the exact same day that USDJPY broke out.

    Nineteen months later on February 11, 2016, as USDJPY was plunging below its critical 120.11 support and stocks were being pummeled to a 2-year low, WTI bottomed out.  It is no coincidence that Feb 11 was the low for the S&P 500, the NASDAQ, the Russell 2000 and the Wilshire 5000.

    Oil

    February 11, 2016 was a very odd day.  Janet Yellen testified before the Senate Banking Committee that the Fed’s decision to raise rates in December (the first time since 2007) made so much sense that the Fed might continue to raise rates.

    This was an extraordinary comment, given that CPI averaged just 0.12% in 2015, spending half the year below zero. How could Yellen be so confident in raising rates unless she knew something the rest of us didn’t about oil prices and inflation?

    It sure seems as though she did. CL tripled over the next 32 months, topping out at 76.90 on Oct 3, 2018.  The S&P 500 followed its lead — soaring by 62% over the same period.

    The chart above raises plenty of questions. The most obvious is whether the third period ended on Oct 3, 2018.  If so, it would be only about 965 days.  The two previous periods were 1823 and 1925 days.  Adding the average of those two (1874 days) to Feb 11, 2016 would put the end of the period at Mar 30, 2021.

    It’s a fair question.  After the 2003-2007 period, the rally in CL far outlasted that in SPX.  After the 2009-2014 period, SPX far outlasted CL. There were economic and market reasons for both.

    In 2007, stocks had already doubled when the GFC came along.  As markets fell apart, I believe an effort was made to prop up stocks with CL.  But, all it accomplished was driving CPI up to 5.60% and the 10Y above 5%.  Clearly, stocks were no longer inspired by high interest rates and inflation as SPX sunk into a bear market and GDP turned negative.

    Remember, USDJPY was in the process of crashing too.  As stock markets around the world began crashing, Japanese hot money came pouring back into Japan.  The USDJPY plunged (yen soared) 30% from 124 to 87 between Jun 2007 and Jan 2009.  It wasn’t until CL finally found its feet and QE was ramping up that stocks finally bottomed.

    We already discussed the divergence between stocks and CL in 2014.  It was necessary in order to give the USDJPY room to rally.  Oil, which in the wake of the Fukushima disaster was pushing Japan’s inflation and interest rates to unsustainable levels, needed to crash.

    Before we move into the analysis and forecasting segment of this post, I think it’s helpful to look at the combined influence of USDJPY and CL.  Note that the most serious downturns between 2002 and 2019 were those not “covered” by USDJPY and/or CL: the 2007-2009 crash and the 2015-2016 correction.SPX’s Feb 2016 lows were prevented from getting any worse by CL’s bottoming and subsequent tripling and, of course, our old friend VIX.

    VIX broke down through a trend line which had been in place since Aug 2015 and began construction of the falling purple channel which guided VIX lower for the next two years.

    Continued Mar 21, 2pm

    A quick aside: Powell and the Fed essentially threw in the towel yesterday: full tilt dovish. This fits our forecast nicely.  We’ve been looking for rates to drop for months — even after the phoney baloney December bounce. The 10Y tagged our next downside target 2.498% and bounced a bit.  The ZN (10Y price) came very close to our next upside target.

    ES which had dropped through its neckline, rose after the dovish announcement and then dropped into the close, shedding more points overnight.  It was forming a nice little falling channel until shortly after Thursday’s open when it started climbing… …primarily on USDJPY’s bounce off its SMA50 (which was just a backtest) and DXY’s rebound.  It was also helped by AAPL, which shot up through its SMA200 but is closing in on its .618 and channel top.

    VIX has tagged TL support.Ok, back to the forecast…

    I’ll lead off with where I think this is going and then see whether or not the charts support that outcome or something else entirely.  I know it’s somewhat ass-backwards, but I think it’ll make sense once I lay it out.

    Here’s my favorite case: a drop to 2138 shortly before the 2020 US election.This is a more alarming alternative.I’ll explain — and, my apologies in advance if I step on any toes.  I tend to dislike most politicians, so I’m not taking sides here — merely speculating on what those who are writing the script of this market might have in mind.

    If I’m a Fed President, senior Treasury official or senior commercial or investment banker, I live in fear of a second Trump presidency.

    Yes, I know that the market has rallied nicely so far under his term — though I would argue it is largely because of the algos and has little to do with what he has actually done (other than front-loading corporate profits via the tax bill.)

    Unless he resigns, dies or is impeached or indicted, he’ll be running for office again.  I believe most people in government and finance think he’s a loose cannon (one of the more polite criticisms) and would love to have him out of office next go ’round.

    The democrats would be stupid to impeach him.  It would merely stir up supporters and, if successful, it would land Pence in the presidency.  Pence would plainly be harder to campaign against — lots less ammunition. If they’re smart, they’ll drag out the investigations, etc. as close to the election as possible and release the most damning stuff in, say, October.

    Now, even those who hate Trump have to admit the market is up 33%.  It’s a good argument for him to hang his hat on.  I can see the bumper stickers: “He might be a dolt and a sexual predator, but the market is up 33%!”

    But, what if the market cratered between now and then?  I think that might be the plan — though with a couple of caveats.  First, the decline could be halted very quickly if he were no longer in the picture — as long as no one truly looney on the left or the right became the front runner. Second, if it became quite obvious (much more than in 2016!) that he was not going to be reelected there would be little incentive to force it any lower.

    How did I jump to this conclusion?  Simple, the charts suggest it.  If SPX can successfully defend 2703, then this theory falls flat on its face. But, it has dipped below 2703 many, many times in the past 14 months.  Since the next lower major Fib is 2138, it’s the logical target if SPX breaks back below 2703.

    As it happens, next Fall represents the intersection of the rising channel bottom from 2009 and 2138.  So, the timing is perfect.  2138 is also the Fib where SPX was when Trump was first elected.  So, it would represent a return to the starting point.

    At 25% from here and 27% from the top, it would alarm plenty of people — except the insiders who have hedged on the way up and those who study Fibs.

    And, we have a pretty good example of how to execute it in the 2015-2016 backtest of 1823 which lasted 2 full years from the time SPX pushed up through 1823 for good in Feb 2014.In 2015, SPX obviously pulled back before reaching 2138.  It made the short call much easier.  I think the same thing was planned for 2703, but circumstances got in the way.  RB and CL spurted higher at the end of 2017 – sending SPX up well past 2703.  By the time CL and RB moderated, the damage was done.

    Note that the difference between 2703 and 2138 is 565 points. The drop from January’s highs to December’s lows was 526 points — not much of a difference.  Had it started when the channel top reached 2703 in June 2017, it would have had 5 months to accomplish the drop and tag the channel midline — comparable to the 21.6% drop from between May and October 2011.

    Members might believe I entertained this notion before. The big channel shown below is clearly a better fit than the one above which includes the Jan 2018 highs.  Note the multiple tags on the channel top all along the way — and plenty of midline tags, too. The problem, though, is that it called for a drop to 2138 by the end of March 2019 – next week.I haven’t ruled it out completely, but the odds of that big a drop by March 30 are certainly a lot lower than they were when I posted this three months ago.

    Then, there’s the Dec 24 lows — a much bigger problem. Remember how alarmed everyone was?  Mnuchin even called in the PPT!  Why such a big deal?

    The answer lies in the white channel midline. If SPX had stopped at 2410.90 — its low on Dec 21 — the 1.618 extension of the drop would have been exactly 2138.04.  But, SPX plummeted through the midline on Dec 24.  This was an accident.

    How do we know?  Because USDJPY dropped through its SMA200 on the 24th — probably because the guys who normally watch such things had taken off for Christmas, and the poor kid who was stuck in the office got caught by surprise.This is all pure conjecture, of course. There was plenty of negative news coming into the session.  But, look at how ugly USDJPY got over the next few days.  If the PPT hadn’t crushed VIX beginning on the 24th, SPX would likely have headed much lower.

    Let’s look at whether 2138 is even feasible.  As we noted above, big drops like this depend largely on a lack of support from CL and USDJPY.  We’ll start with a look at CL.  Here are the cycle charts from above, but with lots of members-only good stuff.  We’ll look at all the reasons why CL might have already put in a significant top and is ready to decline.

    1.  First, let me point out the huge rising yellow channel which does a fantastic job of demarcating the highs, lows and the breaks in between.  It is perfectly aligned with the smaller channel connecting the 2016 and 2018 lows.2.  Note that the latest bounce from Dec 24 looks an awful lot like the bounce in early 2015 which led up to the 2015-2016 correction (a perfect duration match would be Mar 31.) The price ranges are even almost exactly the same:  42.41 to 62.58 in 2015 versus 42.36 to 60.39 for CL (the SMA200 is just above at 61.85.) I’ve highlighted the latest range and copied it to 2015 for comparison purposes.  What made the 2015 drop especially unsettling was that CL never quite tagged its SMA200.  It went sideways for six weeks, then gave up and plunged 57% over the next 8 months.

    3.  The cycle tops are almost exactly the same distance apart — arguing that the 10/3/18 top was a major one.

    4.  The falling white channel from 2008 is a pretty good fit — almost as though it was planned.  CL just bounced off its midline and is closing in on its .786 line – which is also the midline of one of the smaller rising white channels. I put the exact intersection of the two channel lines right at the SMA200.

    5.  Economics:

    There are three causes of rate declines: economics (usually low inflation), central bank manipulation, and fear.  When the 10Y reversed off 3.25% in October, the economics were increasingly scary.  Shortly thereafter, it became about fear. Since January, the Fed has been in the process of trying to shift into manipulation mode.

    Most readers will remember this chart which shows how a slight rise in rates would exacerbate an already frightening debt and interest expense crisis.

    At 3.25%, TNX had reached the top of a long-term channel.  Given the above, a breakout of this long-term trend would have been unthinkable.Interest rates had to be brought back down, which as we’ve discussed meant bringing inflation back down which, in turn, meant bringing oil and gas back down.  That’s why when CL peaked on Oct 3, TNX peaked two days later.I’ve charted this relationship many times in the past, but a quick reminder wouldn’t hurt.  CPI is highly correlated to oil prices.Though, the more dramatic comparison is between CPI and the YoY changes in oil prices.

    We see an even closer relationship between CPI and YoY changes in gasoline……especially over the past few years.  When CPI fell below 0%, YoY RB spiked.  When it topped 2%, YoY RB slumped. The last two years has been focused on keeping CPI in the sweet spot: right around 2%.

    Changes in CPI have been very strongly related to “problems” in interest rates over the years.

    The 10Y usually peaks before CPI, presumably as bonds “price in” expected shifts in inflation.  There have been seven tests of the channel top over the past 30 years — the last one occurring on October 5, 2018.  Each test and reversal was accompanied by an inflation “event.”

    The events varied in nature.  In Jan 2000, for instance, the 10Y (the blue line) shot up to 6.8% when CPI (red line) pushed above the highs reached in 1991.  CPI topped out two months later at 3.8%.

    Between 2003 and 2007 the 10Y had difficulty keeping up. The 10Y peaked at 5.3% even as CPI surged above its 2000 highs to 5.6%.

    Since the crash, the moves in CPI have been tailored to keeping the 10Y on track — with the latest drop delivering a 2.50% 10Y yesterday.

    I have meetings outside the office most of the day Friday.  I’ll continue this post Friday afternoon.

     

     

     

     

     

     

     

     

     

     

     

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  • The Market’s Latest “Lucky” Bounce

    That’s a relief!  For months, pundits have been arguing whether the Fed needed to hike interest rates three times or four times this year — you know, because of all the growth coming down the pike.

    Fed Über-Dove and “Man Who Thinks Market Integrity is Overrated” Jim Bullard just announced that the correct number is zero.  That’s right.  Everything is perfect just like it is.

    Amazingly, and quite by coincidence, this pronouncement occurred on the exact same day that several stock market indices were in danger of falling below a very important technical level of support: their 200-day moving averages.  As we discussed on Monday, falling below the SMA200 isn’t usually very healthy for markets.

    For visitors and new members, this seems like a good time to take a walk down memory lane.  This isn’t Mr Bullard’s first rodeo.  Nor is it the first time “someone” did something clever to ensure the market’s continued ascent.

    The S&P 500 illustrates the phenomenon quite well, having experienced a number of such fortunate events at crucial times. October 2014 – Bullard!

    Bullard appeared on Bloomberg to explain that another round of QE might be in order. As “luck” would have it, this enabled SPX to reverse right as it reached important Fibonacci support, ending a 9.9% tumble and narrowly averting an official correction.

    Big assist from USDJPY, which soared 16% over the next 7 weeks in spite of the fact that more QE should have weakened the US dollar.  The Yen Carry Trade in all its glory.

    August 2015 – USDJPY!

    This 12.5% correction was set up by USDJPY falling back below a critical Fibonacci level (the .618 at 120.11) in the wake of SPX reaching a key Fibonacci extension (the 1.618 at 2138.)

    We had correctly forecast the top [see: The Last Big Butterfly] but it was unclear whether or not USDJPY could remain above 120.  SPX plummeted when 120 finally fell but, as “luck” would have it, was (temporarily) rescued by USDJPY’s bounce back above it.

    February 2016 – Oil!

    The price of West Texas Intermediate Oil (CL) had fallen 77% between Aug 2013 and Feb 2016.  While this crushed inflation to a manageable level, it made investors in and lenders to energy-related companies pretty nervous.

    As “luck” would have it, CL bottomed out on Feb 11, 2016 — the exact same day that SPX reached that critical Fibonacci support level of 1823.  CL doubled over the next four months, and SPX rebounded sharply.  By accurately forecast the bottom in oil, we could confidently call a bottom for SPX [see: USDJPY Finally Relents.]June 2016 – USDJPY!

    Stocks plunged in the wake of the Brexit vote.  As “luck” would have it, USDJPY — which had used CL’s rally as an opportunity to reset — picked this particular day to bottom out and spiked 8% higher over the following month.

    Futures had sold off by 6.5%, but by the time SPX opened the next morning the recovery was well underway.  It was soon back above its recent highs and the critical 1.618 extension at 1.618.  In other words: new all-time highs.

    November 2016 – Trump*!  Unfortunately for stocks, the US election results weren’t conducive to a rally.  Once Trump’s election became apparent, futures plummeted over 5% in a matter of hours.  SPX had bounced off its SMA200 a few days earlier.  Unless something was done quickly, it would drop through this key support the following morning.As “luck” would have it, USDJPY picked this particular day to bottom out.  It spiked 5% over the next few hours and 18% over the next few weeks — a supersized version of the exercise which had saved stocks post-Brexit.

    And, if that weren’t enough, VIX — the widely accepted indicator of fear and volatility — plummeted even as futures were plunging.  It’s the equivalent of calling your insurance broker to cancel your homeowner’s policy as a hurricane bears down on your beach house.  How very, very “lucky” indeed.Futures recovered almost all of their losses by the time the cash market opened the following morning. VIX went on to shed over 50% of its value and broke down through trend line support (above, the white arrow.)

    Stocks were soon registered new all-time highs. The talking heads called it the “Trump Rally” and attributed the gains to the incoming president’s pro-business orientation and deal-making acumen. But, I think it deserves an asterisk…on account of the incredible “luck” involved [see: Why the Trump Rally is a Fraud.]

    The SPX chart isn’t labeled as such, but the rise from 2138 to 2703 (the next major Fib level) wouldn’t have been possible without continued support from oil and VIX.  After doubling in value, CL proceeded to construct a well-formed rising channel (below, in purple) that was very supportive of stocks.  It oscillated between the channel’s top and bottom like clockwork — until December 2017.  We’ll come back to that.Also during that time, VIX was trying something new.  After years of occasionally bouncing off the bottom of a long-term channel (below, the yellow arrows) it decided to plunge below that channel bottom and spend 80% of its subsequent days in the cellar — reaching new all-time lows in the process.This sent a strong all-clear signal to stocks (or, at least the algos that trigger stock purchases) that the coast was clear. It was completely safe to buy stocks, which they did — producing a rally that accelerated all the way up to the 2.24 extension at 2703.

    December 2017 – Oil!

    At that point, oil’s breakout (remember the purple channel above?) and the onslaught of new, daily lows in VIX combined to give SPX the boost it needed to climb above that resistance.  I mean, how “lucky” can you get?  It popped above 2703 and tacked on another 6.3% for good measure.

    Unfortunately for stocks, though, there was a practical limit to how high CL could go without creating problems.  Someone had forgotten that higher oil prices mean higher inflation.  And, higher inflation means higher interest rates.  And, when you’re $21 trillion in debt and pass a tax bill and budget that greatly widen the deficit considerably…higher interest rates are not exactly lucky [see: Why Higher Interest Rates Are a Problem This Time.]

    Between that realization and a growing disconnect between price and supply & demand, CL had to drop.  When it did, and the (dashed, red) trend line from August 2017 finally broke down, stocks didn’t take it well.SPX plunged almost 12% over the next two weeks, one of the sharpest corrections ever.  Luckily, the SMA200 was there to catch it.  A few days later, CL popped back above its channel top and SPX recovered to back above 2703.

    As the bounce began to fade, we had a surprise message from Bullard that “too many rate hikes could slow the economy.”  It was enough to extend SPX’s bounce for another few weeks.  But, ultimately it slipped back down below 2703 to tag its SMA200 again.  And, again.  And, again.  And, again.

    By then, DJIA and RUT had finally risen to the point where they could tag their SMA200s as well.  SPX bounced at our 2561 target.  Investors were in luck!  Until this morning.

    April 2018 – Bullard!

    Apparently, someone forgot to explain to the Chinese that we were supposed to win the trade war (winning them is easy!)  This morning, we found out that China had the gall to fight back.  When I was woken by an price alert at 3:15 this morning, the futures were off 55 points.  SPX would open back below its SMA200.

    But, the futures didn’t know what they were up against!

    Then came Larry Kudlow, the guy who in May 2008 called the impending Great Financial Crisis a “non-recession recession.”  Some people might have misunderstood; but, obviously he meant it would be much worse than a recession.  (I can’t wait to find the pot of gold!)

    As “luck” would have it, the market was quite pleased with all this positive scuttlebutt.   ES, once down 55 points, closed up 34 points.  SPX and the Dow rose about 1%.  RUT added 1.30%.  And, COMP — which never did tag its SMA200 — popped 1.45%.  Take that, 200-day moving average!

    Bounces are nice, whether driven by oil, the USDJPY or Fed cheerleaders.  This one got SPX back above its SMA200, which is a good start.  Next comes the 2.24 Fib, which SPX has crossed some twenty times in the past two months.  Can it rise back above and stay there this time?

    Oil’s limitations haven’t disappeared.  Managing inflation and interest rate expectations will continue to dominate its price action.  Lately, the market has a very narrow range within which it feels comfortable.

    USJDPY is threatening to break out from a falling flag pattern, but one has to wonder why it hasn’t done so already.  Japan got no love from Trump in the trade war chatter to date.  It’s quite possible they’re done cooperating with currency intervention. VIX, after popping back above the yellow channel bottom in dramatic fashion in February, has fallen back to a trend line (red, dashed) from its January lows.  Every time it pops above the trend line, SPX stumbles.  Every time it drops below it, SPX rips.  Today, it tagged it and reversed lower – hence the day’s gains.  It has plenty of additional downside potential, with the potential to drive stocks back above 2700.  But, again, it hasn’t done so yet.

    It makes one wonder whether SPX will be allowed to put in a lower low in order to make the corrective wave look a little more conventional and give COMP a shot at its SMA200.  We have oodles and oodles of downside targets if SPX’s SMA200 should fail.  That white dot at 2138 in the chart above is there for a reason [see: More Where That Came From.]

    There are countless other factors I haven’t even mentioned: our yield curve model (which tentatively turned bullish today), 10yr note rates, the US dollar’s buoyancy, various momentum indicators, and the continuing sagas of FB, TSLA, AMZN and DB — all of which have played a role in the market’s gyrations (mostly of the bad luck variety.)

    Whatever happens, it’s hard to imagine we could reach new highs without plenty more luck.  Trade safe, and stay tuned.

     

     

     

     

     

  • RUT: How it Got Here, Where it’s Going

    About a month ago, as part of the series of charts inspired by our latest analog [see: Analog Details Feb 7, 2018] I hazarded a forecast for RUT that called for a rebound to the rising white channel (which had recently broken down) by Feb 14, a retracement on Mar 1, and a subsequent rally back into the rising white channel. The only serious uncertainty at the time was whether ES’ tag of its SMA200 was sufficient — or whether SPX would need to follow suit.

    In any case, SPX did go on to tag its own SMA200 the following day, meaning RUT posted a slightly lower low before rebounding.  It reached the white channel on Feb 14 as expected, but continued leaking higher for several days before putting in a low as scheduled on Mar 1.Since then, it has nonchalantly rejoined the rising white channel as though nothing was ever wrong.  It has done this many times in the past, of course.  So, that’s not terribly noteworthy.

    What is interesting is that the Feb 9 plunge facilitated an important backtest that should help determine whether it has further upside ahead.  What’s fascinating is the extent to which nearly every one of RUT’s twists and turns has been driven by algos.

    The precision of these moves leaves little doubt that they’re by design.  No random walk, here.

    continued for members… (more…)

  • Does the Yield Curve Matter? A Closer Look

    I called a top in SPX on May 20, 2015 [see: The Last Big Butterfly] because it was about to reach the 1.618 Fib extension at 2138 — our upside target from way back in 2012.  SPX peaked the following day and fell over 300 points before it was all over.

    What I didn’t notice at the time was the bond market. We’ve focused on this from time to time, most recently on Dec 29 [see: Should You Fear the Yield Curve?]  We noted at the time that while the spread between 10Y and 2Y was dropping rapidly, it only represented a warning unless it bottomed out and rose rapidly.  From that post:

    …the above shows that while the potential is there for a recession, this is just an early warning at this time. If the yield curve bottoms out here and rapidly steepens, we’ll have a lot more to worry about.

    Two sessions later, the spread did bottom out, and has been on a tear ever since.  What does this mean?  Let’s look at how things unfolded in the past.

    The spread had been tightening since Dec 31, 2013.  It bottomed in Feb 2015 and began rising again.  In early May, it broke above a trend line (red, dashed) connecting its highs.

    About the same time that SPX was peaking, it backtested that TL and continued higher.  It broke trend (purple, dashed) around Jul 31, a few days before SPX fell off a cliff.  It broke down to new lows (the red, dotted line) in Jan 2016, about the same time that SPX bottomed out.What the yield curve said, then, in simple terms:

    – a breakout from the downtrend marked an equity top (bearish)
    – a breakdown of the subsequent uptrend was really bearish
    – a break to new lows represented a potential bottom (bullish)

    Before I go any further, I want to point out that there were four significant bottoms in 2015-2016.  The first two came close to backtesting the 1.272 Fib at 1823, but didn’t quite make it.  The second two did.Now, let’s look at the same period, but comparing the 10Y (TNX) itself to SPX.  Note that SPX peaked shortly after TNX reached the falling red TL, and began having trouble once TNX broke out.

    SPX fell off its cliff when TNX fell back through the rising purple TL, making bottoms each time TNX did. On Jan 20, 2016, TNX tested its Aug and Sep lows, at which point SPX bottomed at 1812.  A week later, TNX plunged below the previous bottoms and didn’t bounce until it reached the Jan 2015 lows (dashed, purple line.)

    The message delivered by TNX was slightly different from the 10Y2Y:

    – rising up to tag the falling trend line represents a bearish turning point
    – breaking out above it is okay, as long as the uptrend continues
    – a breakdown of the subsequent rebound is really bearish
    – stocks won’t bottom until TNX does

    If we look at the chart below, we can see that the 10Y tracked the 10Y2Y quite closely until it diverged in late 2015 in a failed effort to support stock prices.  It didn’t provide decisive support until it bottomed in Feb 2016 at its Feb 2015 lows.  For a few brief days, the divergence disappeared.Why is this even remotely interesting, you might ask?

    As in 2015, we have also experienced a huge divergence between the 10Y2Y and the 10Y itself.  This is noteworthy in and of itself.But, the comparison gets even more interesting.   As in 2015, we have had an extended slump (14 months vs 17 in 2015), a breakout above the falling red trend line, and a backtest of the trend line.The big differences, so far, are that the spread hasn’t gone on to new highs and that the (presumed) low came as spreads were peaking and only two weeks (versus 8 months) following the peak.

    But, so far, the lessons from 2015 are holding.  The breakout above the falling red TL definitely produced a drop in stocks.  The backtest of the red TL has occurred, but it hasn’t quite reached the purple TL.  As long as it continues bouncing and doesn’t drop back through that TL, stocks should be able to continue rising.  The day it drops back through it, things could get nasty.

    Next, let’s look at the current TNX chart.  We could look at the drop since the Mar 2017 highs, but it was rather short-lived and the subsequent rebound has resembled a moon shot.  Instead, let’s look at the big picture.

    A trend line from the 2008 highs connected with the 2010, 2011 and 2017 highs.  After reversing at each, TNX was accompanied by a large drop in stocks.  TNX’s reversal from its 2013 highs never produced a stock selloff; but, then again, it didn’t quite reach the TL.

    Zooming in a little, we can see that TNX reached this trend line a couple of times in 2017: first, in March, when its reversal accompanied by a mild 78-pt drop in SPX, and again on Dec 20 in a reversal which never gathered any steam.  TNX was back to and punched through the TL on Jan 8.  It reached another TL (gray) drawn through other recent highs on Jan 22 at 26.65.  This was a potential top, meaning the bond folks breathed a sigh of relief.

    On Jan 26, however, it popped up through the gray trend line.  Not so coincidentally, that was the day that SPX peaked.Remember our lessons from TNX in 2015:

    1. reversing off the falling trend line represents a bearish turning point – it didn’t reverse

    2. breaking out above it is okay, as long as the uptrend continues – it did, but as it approached 3%, folks started getting nervous.

    3. a breakdown of the subsequent rebound is really bearish – we got a potential reversal at 29.43, but it has a long ways to go before reaching the rebound trend line, currently at 24.40.

    Interestingly, that TL intersects the falling red TL at about 24.60 on Mar 13, the day that CPI for February is reported.

    And this is where it gets interesting.  If TNX continues to rally, bond folks and equity folks will get nervous (the fiscal fiasco.)

    If it were to fall to the rising purple trend line and backtest the red trend line at 24.60, it might be somewhat bearish unless: (a) it reflects a big drop in inflation (in keeping with my oil and gas forecast) and (b) it rebounds there.

    If it fell below 24.60, the TNX lessons suggest that SPX would be in big trouble.  With a Fed meeting a week later, we can assume Powell et al would be focused on preventing that from happening.  But, as our analog suggests, this preceeds an important inflection point by just a few weeks.

    If TNX falls through 24.60, remember lesson 4…

    4.  stocks won’t bottom until TNX does

     *  *  *

    Now, onto our analog update. In our initial post and follow up from Feb 6-7 [see: Analog Watch], we anticipated SPX would rebound from 2533 (our downside target) to 2765 by Feb 14 and 2812 by Feb 23.  Instead, it bounced from 2532.69 to 2742 on Feb 16 and to 2789 — 23 points short and 4 days late — by Feb 27.

    An adjustment was clearly necessary, given that SPX and ES bottomed on different days.  We’ll try to reconcile the two, along with some economic forecasts which are definitely outside the norm.

    continued for members… (more…)

  • What is Deutsche Bank Trying to Tell Us?

    This morning’s rally is pretty good confirmation that our analog is playing out.  I’ve spent 18 of the past 24 hours charting, and have some additional info on what to expect from SPX, ES, DXY, USDJPY, EURUSD, TNX, ZN, RB, CL and, of course, VIX over the next two months.

    I’ll post it later today, but I’ve yet to come across anything that concerns me from a charting standpoint (i.e., conflicting signals.)  But, of course, there are any number of things that could throw it off track or bust it all together.

    One example is Deutsche Bank.  I don’t usually post about individual stocks, though I do a lot of charting on them for consulting clients.  In this case, I had a client who was trying to decide whether to throw in the towel on the stock.

    I called the bottom 2 days and 4 cents early at 11.23 on Sep 27, 2016 [see: Deutsche Bank – Will it Survive?] and it dutifully bounced up through our various targets until reaching the last target (20.43) I laid out in our Dec 7 post on the stock [see: Deutsche Bank – Another Pause or More?]My view at the time was that DB would correct modestly.

    If DB makes a meaningful reversal here, the rising white channel I’ve sketched in should take form – opening the door to a deeper backtest and fleshing out the rising white channel. It emerges from the falling red channel around Jan 13 at 14.30ish. But, the more conservative target would be the midline at 16.90.

    As it turned out, DB topped out at 20.94 (after gapping higher, gaining 5.6% that day alone) on Jan 25, and reached 16.90 (-19%) less than 3 months later.  It didn’t stop there, however.  It dropped on down to and through its SMA200 and a 50% retracement of its rise where it finally bounced at 15.79.

    Since then, it’s been bouncing back and forth between roughly 15 and 20.  This has been going on for almost a year, since March 2017.  It’s enough to make you wonder where senior management’s incentive stock options are priced.

    The Feb 2 drop was a real blow — the latest drop through the SMA200. As of this morning, DB had dropped 22% since Jan 24.  It’s in line with the string of 20% drops and 20% rallies which had occurred every month or so through last September.

    But, this one looks different from a charting standpoint.

    continued for members…

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