S&P 500 Autopsy Report

The concern on Friday that the structure we were building could fail turned out to be warranted. That is a bit of a shame, as the sentiment here continues to suggest to me that such extremism will be severely punished.

That said, how do things stand now?

I will present a variety of technical observations that I see.

$ES came and tagged parallel rails today and is diverging on the RSI on multiple timeframes. If this is a low of great significance and we rally powerfully from here, this will become effectively a huge bull flag.

ES

$NQ has the exact same structure here, though the divergence (although present) is less pronounced:

NQ

$RTY has checked in on a major, macro high (from 2018):

RTY

These taken together with sentiment here could very well lead to a rally. The biggest question on my mind right now has been: “If everybody was expecting the circa 4000 gap to be filled, why did the market give it to them?”

I have been skeptical of us reaching this level because of the broad consensus that I could detect. I hope you can appreciate that. I’m sorry for getting it wrong. But I actually tallied it up at one point (it wasn’t just a guess): I follow about 60 analysts and 38 of 42 who were producing present targets were calling for that gap to be filled (or lower). I have never seen that before, and I think I was warranted to be highly skeptical that we’d reach it, especially given how badly sentiment has deteriorated these last weeks.

But, here we are today, and the gap has been filled:

SPY

Now, of course, the permabears think we’re going to go much lower from here, that we’re in a serious bear market. And so the gap fill is more or less irrelevant. The others are typically bulls, and they were looking to buy this level because, they believed—as I do—that this is merely a correction in an ongoing bullish trend. And they were looking for this level to be reached either to fulfill a “four” of a smaller degree, or a “two” of a larger degree.

In other words, either this:

SPY

or this:

SPY

In either case, they were looking for this level to be reached and for this correction to end.

Interestingly, I’ve gone back and checked some of their most recent work, and I no longer am seeing these analyses. In every case that I can find, it looks like everyone is now not looking for a major low to be put in right here at this gap. How odd…

So I wonder what has happened here, psychologically? Was there a consensus that we would reach this level, but no one really had faith in the call, and no one played it to this level, and so that’s how we got here? Wouldn’t that be bizarre? I have been worried that everyone was intending to buy this level, but now that we’re here, I can’t find a lot of evidence that anyone actually has any appetite to buy this level. Interesting! 

Now that we’ve reached this gap that I said we probably wouldn’t reach, the broad consensus I now see is that everyone expects any rally from here to simply fail.

If the market really is that bearish, that’s just the thing bulls want to see. A rally no one trusts and that few participate in.

One other interesting event today: the 10-year yield did, after all, hit that ancient trend line and reversed:

Zoomed out:

10YRYLD

Zoomed in:

10YRYLD

I mentioned before that it’s possible that the market has just been waiting on this to finally happen. If peak inflation is behind us, and the inflation trade went way too far, things could get very bullish. CPI is coming out on Wednesday. I would expect if that is going to come in cold (because base effects are rolling off—discussed at the end of this article) that the market should rally in advance of that improving data, not ringing the bell at the bottom for people.

If we produce a powerful rally from here, my target is the orange box:

ES

Several technicals align there:

  1. Bull flag upper rail
  2. COVID trend line
  3. And it’s the 50-61.8% retracement of the decline from the top of the market

That is the spot at which the entire world is going to try to short the S&P 500.

If we rally powerfully from here, let’s say to that box. Most people are going to think it’s a short squeeze. But they’re not entirely right. I think it will only be half of the short squeeze. With the market this bearish, there is great potential for a very powerful move, possibly almost back to the all-time high in almost a single gulp. Or at least that is my expectation.

Given sentiment here, if we can get to that orange box, and if the inflation trade is unwinding, I think a terrific squeeze can happen from there in addition to the one getting us there.


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