So Far So Good; Alternatives I See From Here Are Either: 1) Bearish, or 2) More Bearish

I don’t have a lot fundamentally to discuss this weekend. I will, however, run through a somewhat long list of technical features that I see on a variety of instruments.

It is still possible for the S&P 500 to have another leg up (discussed here) because the triangle did not break down and we began to take out some of the highs to our left (from this again), but, we perhaps did not take out enough of them, as the consolidation from 6/29 (orange ellipse pointed to below) is especially important. As it stands, the rally on Friday felt to me like short covering only, and we remain within “technical” bear market territory.

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If we keep going us for a bit, I won’t be surprised, but I think right now there remains a much greater chance that we move lower from here. I will present a bunch of the things I am taking into consideration.

Despite rallying 2.4% from the overnight low to the high just before the close of the session, all we accomplished was a revisit of the 10-day EMA (yellow EMA below) from beneath. And, as such, we now remain below all moving averages, all of which are sloping down:

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It’s a terrible look. To rally like that without even being able to recapture that basic, lowest EMA. Terrible.

The $VIX continues to develop an alarming coil, consolidating first and foremost in a large wedge (red structure below), within which it has formed a series of bullish wedges (orange and then green structures below). The market doesn’t have to bottom with a big $VIX spike. And yet, this is essentially exactly what the $VIX does before it does spike. It coils and coils and coils like this. This is playing with fire until it decidedly breaks down. Until it does, this kind of coiling is sort of like building a lot of energy, giving us at least the potential for a tremendous move.

VIX

Sentiment seems to suggest that the move should be lower, with equities rallying, but I don’t see enough technical structure in the indices and individual names to support that, making it at least just as likely (if not more likely) that the equity markets are setting up for a waterfall down.

The S&P simply looks like a well-defined bearish wedge at this point. I had been examining parallel rails (here), but connecting to the actual highs and lows gives us the contraction for a wedge, from which we have broken down already, Friday during which we retested from beneath:

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So, it’s a bearish structure.

$AAPL‘s structure is consistent with a setup for a deep plunge from here, as it can be counted well here as a “nest” of ones and twos. After falling precipitously from the early June high (green “1”), it retraced 50-61.8% of that decline (green “2”), then fell again (blue “1”), and retraced 50-61.8% of that decline as well (blue “2”). As it stands, it looks awful and there is little stopping it from entering a “3rd of a 3rd” waterfall.

AAPL

If we do need another rally, this can be invalidated, but the setup is quite good for a deep plunge.

Similarly on $AMZN, it’s possible to try to count it impulsively up, but that has two defects. First, the “impulse” wave (blue “1” below) doesn’t have extension in any of the 3 motive components (in either the orange 1, 3 or 5). It looks squashed. And secondly, if the retracement (blue “2) is a two (green arrow), it’s very deep, retracing almost the entirety of the prior advance:

AMZN

The alternative that looks better is also a nest of ones and twos to the downside, like Apple. This would fulfill the very dark head and shoulder’s possibility discussed here previously, taking this to $75 or lower.

AMZN

A longer-term concern of mine can be seen in Ford (among others). In May, I had discussed my reluctance to become too bearish yet because of the terrific potential these breakouts in some industrial giants presented us with.

And let’s check in on that important, long-term breakout:

F

Oh.

We have completely lost that multi-decade break of trend (and the 50-61.8% retracement of the advance from the COVID low—orange box), and that is also the case for the other two stocks discussed in that article. That is quite concerning. The setup for a big “1-2” on these names is less credible for the time being.

$JNK looks sort of awful here. There is a clear bearish pennant, the measured move of which supports a waterfall risk off environment:

JNK

We by no means have to get the full measured move, but it looks awful at present.


My thesis has been that yields would roll over, indicating that the inflation fears were ending and signaling that the Fed would relent. One problem we have of course is that some of that trade will also be indistinguishable from a general rout in equities, as bonds tend to get a bid in equity routs and things like oil tend to puke hard. And what we don’t have yet is anything in hand—from the Fed—indicating that they may relent. To the contrary: they continue to offer firm language in support of tightening.

Now, it is possible that we’re looking at this through the wrong lens. It’s convenient to believe that the Fed doesn’t want the headache of a market crash and that they will step in to support risk assets soon. And yet, on the other hand, there may be geopolitical risks at play right now that that naive view doesn’t take seriously enough.

Not to develop the plot of a spy novel here, but let’s be honest. Putin is no friend to liberal, western democracies. And he is in the mood for escalation here. The west has two choices: respond in kind, leading to kinetic warfare, or perhaps another alternative. A harsh recession would collapse energy prices, which would collapse Russia’s exports, and their economy with it. We’re over here thinking that the Fed will relent, but it’s possible that there’s something much bigger cooking in the background. And perhaps the powers that be have made a decision, the lesser of two evils: a sharp (deliberate) recession (where many people suffer) as opposed to the risk of kinetic war with a nuclear power (where many people die).

I insist: I am not trying to speculate about a spy novel plot. I’m only suggesting that we should be open to huge forces in play that we cannot easily assess, as none of us are power brokers in the world. So, if there is something brewing, maybe they can tolerate a market crash, because maybe there are worse alternatives out there that we are not easily assessing from our limited perspectives. In other words, if there is a de-facto war on right now, there could be consequences that are difficult for us to see at the moment. Crashing the markets might be a weapon, for all we know. And a gentler weapon (odd as that sounds), among those available to us.


Now, we have a historically bullish week ahead of us. But, that historical average is a consequence of bull markets lasting more years in time than bear markets. Some years in which early July have been terrible include: 2001, 2002, 2008—in other words, in bear markets. And we’re in a technical bear market right now as it stands so “historically bullish” week ahead of us might not mean what we want it to here.

We also have limited Globex trading over a U.S. holiday, and if they want to rug us, it’s a great time for them to do so, like what they did to us on the “Thanksgiving massacre” of last year. Then, as now, we were involved in a bear flag and gapped down several percentage points after the holiday. So, it’s possible here.


So, possibilities are plentiful. I will mention 4.

1. We could go up, and if we do, I have already noted my expectations here.

2. We may also be in one of two ending diagonals. The first, I have presented before (here). In that view, we head lower now, but only gently take out the 6/17 low (for that pink “3”) before a shallow rally, and one final drop to complete the whole structure.

3. An alternative to that ending diagonal is one where we’ve already completed most of it, and have only more drop, like this:

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On this view, it’s still a pretty steep drop, but it’s one where we’re just going down to visit that 250-week EMA and the bull will resume.

4. And the darkest alternative is that we’re not in an ending diagonal, but we’re building a proper impulse wave to the downside, in which we have completed a 1-2 (in pink), a 1-2 (in orange) and a 1-2 (in green). This would be quite the calamity.

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I think option #3 seems most sensible to me, because it seems extreme to expect a bona fide crash, as they are so rare. So, I expect a move to the 250-week EMA, and how we get there and what we do if we do get there, should help us to determine how good or bad things may get.

It would have honestly been better to see the triangle break down on Friday (here) because that would have supported the moderate decline of an ending diagonal much better. The reason is that an ending diagonal must be composed of 3-wave moves all the way through (both up and down), and a triangle breaking down on Friday would have been perfect for that.

Instead by rallying as we did, it gives the super dark (option 4) more credibility as the “equal legs” of the Friday rally is more consistent with a “2,” and not a “B,” like this:

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Dark. I hope that doesn’t happen, but given the $VIX, Apple, Amazon, junk bonds (all noted above), and geopolitical risk, it’s possible here.

Let’s hope for the best, and we’ll see what happens.

If we’re doing either version of the ending diagonal, you know the immediate target: we’re going to shallowly take out the 6/17 low. But if the very dark scenario starts to play out (i.e., we crash), we will likely head to 3000 somewhat quickly from here. Since it’s a super “nest” of ones and twos, we can generate somewhat reliable targets for all of the threes, and here they are, 3 orange boxes for 3 different “threes” (green, then orange, then pink):

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I honestly hope this doesn’t happen. But if we do crash, at least we have levels to look to. Very rare to crash like this, but possible.


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