Diamonds Are a Girl’s Best Friend

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Ok, first let’s recap a few things:

  1. In the October rally, my assumption was that the Fed was not near becoming our friend, and so I assumed that rally would fail and that the market would go on to make new lows.
  2. But as that rally topped, it did some really weird things: both in terms of its structure (weird camel humpy thing and not a clean rejection like all the prior bear market rally highs), and in terms of internals (breadth did not deteriorate at the highs [esp. BPSPX], and high-yield credit kept kicking like a mule).
  3. To my mind, that opened the possibility that the bear market low could be in. Digesting all of that led to this major article.

Now where are we? We are, as far as I can see, about in the same spot. Whether the bear market low is in or not is not something I can easily determine. I think it is still possible for the October low to be the low. But, any failure about right here will probably mean that we are going to go and retest that low. I still give the bulls a good chance here, but I acknowledge that they may not get that chance.

Let’s look at few things. First, the thoughts from yesterday still persist. Some of that structure has fleshed itself out more, and the S&P 500 has made a beautiful diamond.

And in that diamond, the 1-2 in blue is still alive and well:


And, if that was a leading diagonal for blue 1, the “twos” associated with leading diagonals can be very deep and this “2” is very deep.

And also, as a diamond, it did exactly what I want it to do if I were inclined to be bullish: it broke down into the close. That at least opens the door for this to be a terrific bear trap. It doesn’t have to be one. But, something just about like this is just about right. A nice, deep, scary blue 2, diamond breakdown, then kapow! straight up in the other direction. So, at least in principle, I would want everyone to be scared of continuation lower so as to have as few people long as possible.

That said, diamonds can also be continuation patterns. And if it breaks down, this has all been just a consolidation on the way lower. That was my original thought, that we would head lower. But with how high yield behaved at the highs, and with how quickly sentiment has deteriorated, I don’t like that as much. I do like the contrarian option when I can have it. And the bearish trade does feel very crowded. That doesn’t always work: sometimes we’re all bearish together for a good reason (like, if we’re really in trouble), but often it does work, being contrarian, and that’s my preference right now, at least until I can be sure we’re not going to go straight up. And this is a spot where they can do just that, so I don’t want to insist on lower prices here. I will accept them if they come to us, but I at least favor a bullish outcome here for the time being.

Now, junk bonds have been very strong both at the highs, and even during the decline, but that’s not true now. Heh. Junk bonds are crashing and have completely lost their upward sloping channel. However, it might matter more how they behaved at the highs, as opposed to how they’re behaving here, as sometimes JNK can look like garbage right before things get better:


Both very ugly waterfalls. In the first one, that led into a wave 3 up on the S&P 500. And we don’t know if we’re about to enter a wave 3 on the S&P 500 here, but we might be.

So, we’ll have to see. Things look like crap, but sometimes—sometimes—that’s just how things look right at the very moment when they suddenly stop looking like crap.

To quote my big article from the 17th, same thing applies today:

In sum: my thesis has been that we’re headed lower, maybe much lower. It’s still a good thesis. But if that’s wrong, it’s going to be very wrong right here.

Let’s see what happens. I remain modestly long via futures with a stop in place. We dump, I’ll be stopped out and will flip and dive into the abyss with all the flames and anguish.

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