$SPX Early Weekend Review

Normally I save posts with a few extra charts for the weekend, but I want to bring a bunch of things together now, and so this will be the weekend update a day early, and I will review these ideas this weekend.

First, I’m going to briefly back up a few weeks so that you can see a contrast that I would like to make explicitly clear.

When we were rallying to this high on the S&P (red arrow):


I thought the rally would retrace, and in fact, originally, I even thought that it was going to be a major top that would be the head of a large head and shoulders topping process (you can see that here). But even before that retracement had started, I was quickly becoming skeptical of how enduring that drop would become. And why?

My reasoning for that involved some of the internals I like to watch.

When that CPI spike happened on 12/13, $JNK also—unexpectedly—made a new spiky high with it. That spike was here (red arrow):


Usually—very often—high yield credit diverges from the S&P at highs on the S&P. And at that high, no divergence.

In addition to that, the $VIX was in this giant bearish wedge:


And, as we declined, breadth kept improving, which isn’t what you want to see in a drop that’s either going to stick or get even worse (see the green divergences below):


Fair enough. The drop didn’t stick, and we’ve rallied, as I worried we might.

So now that we’re moving up, how do things look? And frankly, I’m now seeing the opposite state of affairs here.

For starters, if the market is bullish, it needs some bullish structure. And so far, this isn’t shaping up to be much more than another big, bearish wedge:


A bearish wedge like that isn’t enough, because bear wedges are sort of close to bullish channels, and if we keep rising, these things can just keep going up.

But even within that big wedge, there’s another smaller wedge forming:


And though there’s no guarantee, this structure is more prone to failure than it is to continuation. A lot of people assume bullish markets must always go up, but that’s not really true. Bullish markets should consolidate. And that’s how bull flags are made. If we’re bullish, it would be better if we were doing this:


But there’s no additional drop. Bull markets refresh themselves by pushing out weak bulls. And it’s those extra drops that do it. But as we’re in a rising wedge, that can be characteristic of a market exhausting itself. Everyone is going all in at any price, bears keep getting trapped and have to cover, no one is taking profits. And markets like that eventually exhaust themselves and get pushed over and since no one took any profits and bears aren’t short, when a decline begins, bulls are forced into losses and no bears are there to become buyers when they cover.

So the rising wedges are usually not good structures.

In addition to that, $JNK is now diverging against these new S&P highs (which I wanted to see and didn’t see at the mid-December highs):


So now we are seeing that divergence, and that’s not good.

And the $VIX, which had been in a bear wedge at the prior (December) high, has now formed an inverse head and shoulders at this high:


That’s not good.

And finally, breadth, too, is now diverging at this high:



This is all painting a very different picture than the one we had just a few weeks ago.

All of this can be fixed in a jiffy if high yield soars, the VIX collapses, breadth surges again, we form a bullish structure on the index, all can be forgiven. But we don’t have those yet, and instead all we have is this growing pile of dogshit.

So, in sum, though I was expecting a major top at the December highs, I abandoned that view when I didn’t get enough to support it. But now, boy, I think I can defend a top much better here. I often say this: price action is King, so if we keep moving up, I will listen to that. But, these leading indicators are pointing in the other direction right now, and I am on high alert. If we’ve just had a major capitulation of the bears, we could be in trouble. If we drop it can be substantial. After a shellacking like this, where bears have been frustrated for months, looking for a steep decline, once we finally get it, they may become gun shy about selling the market. That’s some of the psychology that can needle at people.

And if that happens, that’s what can contribute to a big, big drop. That’s why I posted this, and I’m going to monitor that count until I can’t. I actually now think it’s somewhat high probability.

Zooming in, I think we may have reached or are still approaching primary (pink) B, the green C of which looks like it could be an ending diagonal (that’s the red rising wedge from earlier in the article). It could be done now, but these can also “overthrow,” and so I can’t rule out a gap & crap in the morning. So, I’m going to watch this:


If this breakout of the major red trend line was genuine, I wouldn’t expect all of the internals to look the way they do. This rally looks to be completely running out of steam, just as it’s breaking out. So if that fails here, it’s going to completely lose the breakout, and the 200-day SMA, everything. And all of that will look terrible. So let’s see if this is losing steam. If we get a reversal soon, we might be in for quite a trip down.

Have a nice evening.

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