A Brief Look at the Futures Bloodbath

I will make a couple of observations on the S&P 500, taking into account the gap down tonight and where it sits because of that.

If we are in the bearish count—which has been my strongly favored view until recently—we are sort of doing what I had hoped. And I want to elaborate on what’s maybe missing.

But first, let’s note a couple of things.

  1. We can draw parallel (green) rails, and we gapped under the lower rail.
  2. And, if—just for the sake of testing—we treat the decline off the recent high as a 3-wave move, we’ve come almost exactly to “equal legs” right at 4000 on the nose.
  3. The first thing is quite bearish (loss of potential channel support). The second might be bullish (equal legs might be a place for this part of the decline to end). These are in conflict with each other (as things stand right this second).

ES

If things stay fugly, so be it, I’ve literally been calling for a decline below 4000 and this drop in this direction matches that prediction. But, I want to elaborate some more on why I ditched my long-duration short on Friday and took profits on those. Why so much caution once the move I’ve been expecting seems to finally have arrived? If I don’t elaborate sufficiently on why I’ve become circumspect, folks will accuse me of being flip-floppy and emotional, but I want to explain why I’m cool as a cucumber here.

Part of it is how this wave is unfolding in relation to the 4000 level, and part of it is my perception of sentiment over the course of the last, say two or three weeks. It’s not quite as I expected. And it’s made me suspicious.

What I was expecting is something like this:

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Now it may look like we’re basically doing this, but there seems to me to be some missing elements. Important ones, too.

  1. The drop from Jackson Hole seems much too vigorous for this place in the decline. It’s as if we’ve skipped a wave.
  2. This wave we’re in, if we assume for the sake of argument that it “feels” like a 3rd of a 3rd, should be the wave that punches us through 4000.
  3. It it crucial for bears for that to become overhead resistance.

But by dropping straight like a stone, we can become (and have become) terribly too oversold too quickly now. And so by seeming to entirely skip an important wave (the blue 2 up there), we spent all the bearish energy only just getting to 4000 instead of using that energy to break through it (we still might). There are still of course other ways that this can turn out. But, when we have a volume spike as we did, a breach of the Bollinger Band on the $VIX as we did, these are all perhaps symptoms that no sooner had we left the high then did we suddenly get really close to a low. That kind of “get me out at any price” feeling is not something I want to see off of a high. I want to see that in the middle of a move, or even better, at the bottom of a move.

Capitulation at a high means everyone is perfectly smart and we all got out at good prices. And maybe that’s possible, but that’s why I am skeptical. It doesn’t mean I’m bullish per se. It means that I am equally open to both outcomes right now.

As far as sentiment goes, I would much rather have seen this:

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But what I feel like we have done is this:

ES

It feels out of whack. We may still go lower, I grant. But, taking all of this information into account in light of my expected path to the downside, I am willing to negotiate with my expectations. I am willing to modify them and if we’re near capitulation (we might not be), I will be prepared to accept a bullish outcome such as this.

I am neither abandoning my original call for a move to 3000, nor am I now calling for a move to all-time highs. But whereas before, when I had a strong preference for the bearish view, I’ve lost some of the strength of that preference. I have participated in much of this decline (though I twice unnecessarily protected myself against potential upside that didn’t emerge) and I will be willing to participate again, but I am now just as interested in observing how this will unfold because there seems to me to be at least improved odds for the bulls given the observations I have made above.

Let’s see what we do here around 4000. If I had to guess, I suppose I would be inclined to think that the odds may even slightly favor the bulls. And I know that sounds crazy, but I’m just saying better than 50/50 odds. That’s how much this feels capitulatory to me. It might not be, and we might have a lot lower to go, so let’s see. But I will certainly grant that the bulls at least have an opportunity here that I wouldn’t have granted had the structure and sentiment been different.


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