The Long Weekend Review

There are many possibilities available to us, and too many mixed signals at present for me to be strongly convicted toward any one outcome. This weekend, I will discuss alternatives and discuss technicals on a variety of instruments. It will mostly be a display of information. From that information, I cannot conclude whether we’re bullish or bearish because there’s enough pointing in both directions.

My plan over the coming week is to try to take things one day at a time.

In this lengthy article, I will discuss evidence that points to bullish potential, evidence that points to bearish potential, and some things that seem like unknowns.


Some Bullish Evidence

I want to first discuss breadth. During the last rally, which I expected would fail, we had a rare breadth thrust. The rally was bigger than I expected, and I know that irritated some people that I didn’t directly call for that (though I hope my having shown how I profitably traded around the uncertainties has been helpful). And yet, to call for such a rally would have been to expect what I was not expecting: I believed we were in a bear market rally, and those should only go so far. That one went farther in some respects. And despite that, we’ve now given perhaps too much of that back, which goes back to sort of vindicating my original view. In other words, in order to get all of it just right, one would have had to call for a bull market rally in a bear market, and I’m not sure how I could have done that, or why I would have done that.

Let’s discuss exactly what happened with breadth. At the June lows, less than 25% of the stocks in the S&P 500 were trading above their respective 50-day simple moving averages (it was in fact much less, but I want to focus on the statistic—but for those keeping track, it fell below 1% on 6/17). During the course of that rally, that percentage rose sharply to more than 90%. That is a remarkable statistic. And guess what? Since 1942, 100% of the time, this has happened only after the lows were already in. That is to say: the market (at least in the last 80 years), has never done this and then gone on to make new lows.

And furthermore, during the course of the rally, the length of time the S&P 500 spent above its 10-day moving average was quite long: 23 consecutive trading days. And coming out of a low that was at least 20% off the all-time high, since 1942, this, too, has a 100% track record of only happening once the lows were already in. That is to say: the market (at least in the last 80 years), has never done this and then gone on to make new lows.

I hope you can see why, despite originally expecting the rally to fail, I was capable of accepting this evidence, which inclined me to become open to exceptional bullishness once we had a pullback off that August high. This caused me to exit my long-duration short too early, and to begin looking for a bounce a little too soon (though both turned out ok in the end, as leaving some profits on the table is far different from taking a loss, and catching the rally off the low was still delicious enough for me). I can’t possibly catch every inch, and I caught enough of this in the end.

But that renewed openness to a bullish bias has now been cruelly jeopardized, as this decline has now become severe in its own right. And in fact, it has been accompanied by a breadth collapse, one that threatens the bullish case, and we can all see that on the chart regardless just by looking at the miserable price action since Jackson Hole.

So My Good Lordy. If you’re someone like me who prudently attempts to incorporate market signals into your trading biases, then you’ve had quite the hard time here calling the shots. And it feels like we’re simply at the mercy of spastic Fed messaging:

SPX

And lo and behold, we have come right back to the same spot we were at when the “rates are neutral” comment was made, the market having in effect quickly taken back the Fed’s message as quickly as the Fed sent the message. We priced in “rates are neutral” and then priced it right back out again. We are now back at the same spot. Congratulations, America. Weird flex, but good for you.

If the breadth thrust was the result of the market trying to price in a Fed pivot (“rates are near neutral”) and the Fed realized its mistake and simply corrected that at Jackson Hole, then it may be safe to adopt a bearish bias once again. But we can’t really know, because what we do know is that if institutions are absorbing supply, they’re going to do so in ways that aren’t going to be announced. So we will still have to see.

Let’s look at a few charts. We can all see this general structure, and with the recent weakness, it sure looks like we want to go down there:

SPX

And yet, there are other things we can draw, such as this:

SPX

Right here right now this very second, we just don’t know. If we do rally powerfully from here, it could in the end just be a big big bullish wedge.

And more locally, the other day, I pointed out what looked to me to be an ending diagonal on the futures market. Let’s see what that looks like now:

ES

It is possible that it’s done just about what we would expect it to do. It’s broken out, and it’s possible that the Nordstream news on Friday was just a retest of that breakout. Don’t know. We didn’t take out the prior low. We did bounce right near the close, which coincided with the upper rail of the bullish wedge. So maybe we’re not so bearish. Don’t know.

The $VIX is on a Bollinger Band reversal buy signal (i.e., buy equities) and we have had volume spikes on the ES-mini futures. These may be signs of capitulation.

If this was the only evidence we were inclined to focus on (breadth thrust in the rally, long-term and short-term S&P 500 bullish wedge breakouts & retests, volume), we could justify a bullish bias.

But let us now look at other evidence, too.


Some Bearish Evidence

Some time back, in my “Roadmap” article, I expected the rally to fail, fall well below 4000, then retest it from beneath before falling to 3000 or so. This was developed in response to my belief at the time that we were not near a Fed pivot and that the poor liquidity environment would make equities suffer for an undefined time. Instead, we rallied higher than expected, and then when we did fail, we failed in such a way that I soon began to believe that we were going to use up all of our bearish energy only getting to 4000 instead of sharply through it. And becoming so oversold so quickly could lead to a bounce that would make 4000 support. I have discussed much of this here. And then, instead of getting a super strong rally, we did end up falling more than a hundred points below 4000 after all and when we did just try to rally, we rejected 4000 on Friday (so far).

So where do we stand now? We have lost some of the oversold conditions because of the rally on Thursday and Friday. That makes it possible for us to head lower, though since the rally wasn’t that big or very lasting, it’s also possible that we at least do something like consolidate (or even try to actually rally again). If we drop straightaway, we would definitely seem to be giving up 4000 for good for a while. If we consolidate, we certainly wouldn’t be recapturing it just yet. But if we do actually rally, it still remains possible for us to recapture it after all.

If the market was bullish, I would expect a ping-pong between the 200-day SMA and the 50-day SMA, and that doesn’t look so great. This is (so far) not really a consolidation between them, but rather a rejection of both:

SPX

And the Russell, which I discussed (here) could very easily have reacted positively to the retest of its downtrend breakout. But instead, it’s just done this:

RTY

Only a feeble attempt to launch off of that. And so far at least, it’s a failed breakout. It’s a little unusual, too, to break out that strongly only to give it up like it has. I maybe would have expected a false breakout to stop up there around 1950 on 8/8 before falling.

And so it remains possible that this failure (since it’s still small) is the fakeout (and it’s not the breakout that is fake). And so we are left with the same conclusions: as it stands right now, it looks bad. But, if we do happen to rally from here, it would quickly become a successful retest. A failure from here would be very bearish, and a rally from here might be very bullish. But until we see the rally, this is bearish because it’s a false breakout.

Other bearish things. Above, I showed how there can be two bullish wedges on the S&P 500 (one big, one local and small). But on the other hand, I can also see two bearish structures, also one big and one small.

We may interpret the S&P 500 as having formed a cascade of head and shoulders patterns when backed out a little:

SPX

And even when we zoom way in to the 1-minute chart, we may see the same:

SPX

And if this is a retest of this neckline from beneath on the smallest timeframe, it could be grisly, and it’s possible for us to fall right from here.

And so if this was the only evidence we were inclined to focus on (the breadth collapse in this decline, longer-term and shorter-term S&P 500 head and shoulders patterns, 50-day SMA rejection, Russell false breakout), we could justify a bearish bias.

But since we have reasonable evidence for both cases, I am not inclined to be sure one way or another right now this afternoon.


Unknowns

There are three more things I will look at. And in these cases, they don’t necessarily tell us anything at the moment.

Let’s start with Bitcoin. First, I’ll let you glance at the chart:

BTC

I have been looking for this large structure to break down for weeks. I have pointed to the Jackson Hole selloff using the green arrow. If the equity markets can completely lose their shit, and this damn thing can’t even bother to finally break this structure down (the Jackson Hole selloff here only managed to take it to support), wtaf? Right? Why are building so much bullish divergence? (the line on the RSI at the bottom).

And so when you saw me relax my conviction about us heading lower for sure, this is one reason why. Why in the hell did Bitcoin not fail from this structure after all this time? If it’s been a redistribution after all, then the bags should already be full.

And then as the market—ES futures for instance—made an “ending diagonal” (discussed above), this has sort of made this little wedge or triangle (which you can see with the thin green lines—what we’re in right now). And though Jackson Hole couldn’t get this to break down, we sort of are a little bit now, finally breaking the lower parallel rail. But we’ve certainly not done so with any conviction yet, and we certainly still have diverging lows right now. And so this leaves us in limbo. Will the divergence play out and produce a strong rally? And if so, what does it mean that it can’t break this structure down? Is that bullish (or at least not very bearish) for liquidity after all, or not? Don’t know.

So this one leaves us stuck. If it breaks down it’s bad, if it doesn’t it’s at least not not that bad.

Another technical that is agnostic at Friday’s close is another simple trend line on the S&P 500.

Right now, this is support. We attempted to break it on Friday, but closed just above it. Thus, we closed at support. And when we do that, it’s best to gap down to break that support (I have discussed that before, e.g., here). And it is possible that we do just that when we’re at a spot like this. But, if we don’t break it here, since we’ve tested it now twice, that can produce a strong rally, as it genuinely becomes support. So this is a big unknown right now.

SPX

Another agnostic signal is the 10-year yield:

10YRYLD

The trend line has defined the bond bull market for over 40 years. And we’re right back it again, probed above it even. Quite the inflection. If the bond bull market is over, I don’t know what will happen. Equities have done both well and poorly in past bond bear markets. It is unclear what this is telling us. Will breaking this trend line for good break something in the system? Can the market handle it? I don’t know. I just wanted to point out where this is at.


Possible Paths Are Many

If we’re bullish—that is to say, if we recapture 4000 and the 50-day SMA—I think the surprise will be to the upside:

SPX

I think an inverse head and shoulders will form and that we will go back up to retest the all-time highs. It’s the same basic thought with all the same reasons discussed here.

If we’re bearish, there are so many possibilities I can’t pick one. The less obvious (and so preferred) was discussed here. That is to say that there is wave balance below us but not that far below us. And we can get there in any manner of ways. A couple options could be this:

  • We might consolidate here, but stay under 4000 and under the 50-day SMA before falling to the nice wave balance at 3700 (green path)
  • Or we might just be crashing straight there from here (red path)

SPX

I have discussed the advantage of this count in the other article on it, but in sum, it would involve the June low sticking, as sentiment was poor enough there to justify a major low, among other reasons, such as all those also mentioned in the bullish case before.

And if those areas don’t hold, then it seems logical that we’re just just in a much larger structure, and the natural destiny seems to be the 1:1 wave balance down there at the trend line (both meet at the same spot below):

SPX

And whether that 3-wave structure will be “it,” and we’re done, or whether it’s just the first larger 3-wave structure in an even much larger structure will have to be determined later.


At any rate, I had a lot I wanted to discuss, and I hope you have found this to be helpful.


Note: When articles are first published, most of them are made available only to my Patreon supporters (I do try to publish some public posts on occasion). Over time (usually after a period of a few weeks or so), I make all of the work public. To gain access to my work when it is produced (or to join my Discord chatroom), please consider becoming a patron. Note that there is a 7-day free trial period. More information may be found on my About page and on my Patreon page.


Leave a Reply

Your email address will not be published. Required fields are marked *