Quick Morning Notes

I continue to remain skeptical of what I believe is the consensus here. That said, $ES has made little overnight progress and has gotten tied up at these trend lines (green), instead of outright recapturing them.

If we fail to begin moving up sharply, we may go to the lower bull wedge trend line (red). That’s disappointing because that’s then a mere 100 points from everyone’s primary target, and so it would mean they’ve sort of been right all along.

I’m not quite sure how I would need to interpret that, as the majority is necessarily wrong. Could it mean that everyone is hoping to buy that level and they’ll be wrong about that, i.e., that that level will actually not be a bottom but rather a top? That’s a scary thought. But, I have to at least be open to it, because we keep falling, and if we’re falling, it’s because not enough people are short.

ES

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A Quick Note on the $VIX

As with prior updates (here, here and here), I continue to look for technicals that may support my expectations here.

And now, with the $VIX, we can see that it has arrived at the “upper fan line” built from prior spiky highs.

If this provides resistance, we may get a reversal here that would support a bounce on the S&P, which I continue to expect here.

VIX


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Weekend Stock Market Analysis: What Now After the Pump?

The basic alternatives are this:

  1. The lows are in and we’ve entered a new, long-term bullish structure
  2. The lows are not in and we will revisit them

Early in the week, I suggested that—at least temporarily—the lows could very well be in, and so far that’s played out. And during the course of the pump, I discussed my reluctance to look for the pump’s conclusion (here) and I also discussed the bullish potential it had (here) and so far, that’s all been not entirely misguided.

But, we also still face something of a contradiction here:

  1. On the one hand, we have lots of data points suggesting to me that we aren’t strongly likely to be in a long bear market: we have had no yield curve inversion (and even if we had, these often precede recessions and bear markets, and often by quite some time), sentiment is very bearish, etc., etc.
  2. But we also haven’t really seen a good capitulatory low (volume spike on the e-mini S&P futures contracts, $VIX spike, equity put-to-call ratio surge).

This leads me to remain open to a retest of the lows, though I will also accept no retest, as this rally really is quite impressive and could indicate to us a change in trend.

All that taken as a given, let’s look at some charts.

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Extreme Caution Remains Warranted: A Strong Further Decline May Still Lie Before Us

May still lie before us. I do not possess a crystal ball. But, there is a technical structure I am observing that may suggest a further decline ahead of us in risk assets. This article will lay out the idea in detail.

I am not here to confirm or deny anyone’s bullish or bearish expectations for the markets. I endeavor, instead, to objectively assess the situation in anticipation of its unfolding. In the spirit of that, let us summarize the merits of the bullish and bearish cases, respectively:

Bullish case:

  • It has been my expectation that a reduction of pandemic-related restrictions combined with the weak Omicron variant (leading to herd immunity) could produce a feeling of worldwide relief that could support a very strong appetite for risk assets for quite some time, perhaps even several years
  • We seem to have not—by many sentiment measures—experienced the type of euphoria we typically see at major market tops
  • Many of the destroyed growth names have already endured terrible and lengthy bear markets and if those were all to end soon, their next moves could be tremendously bullish
  • We will be hard pressed to find historical examples of markets topping prior to rate hikes being implemented, and, in fact, they often top long after the rate hike cycles begin (and there has been no yield curve inversion, GDP continues to grow, etc., etc.)
  • There is an enormous amount of “cash on the sidelines,” some estimates I see place that in the trillions of dollars.

Bearish case:

  • The short and intermediate trends remain decidedly down, and if we go much further, longer term trends may also become threatened
  • The events in Europe may cause rapid-onset contraction in many economies (Russia’s of course, but also, say, of Germany’s, as 70% of their energy supplies come from the now heavily sanctioned Russia—see how the $DAX has interpreted these events)
  • A rapid contraction will of course not been seen by leading economic data
  • Any such unanticipated contraction may become contagious

Weighing these two groups continues to lead me to believe that we are in a correction, and not a bear market. A point of clarification: when we use the phrase “bear market,” we can mean two things: oftentimes, we mean by that a long, and drawn-out decline in asset prices lasting many months or years; or we can mean a “technical bear market,” typically understood to be a decline of 20% from a recent high in a major index (such as the S&P 500). When I conclude that a “bear market” continues to seem less likely to me here given the totality of the evidence listed above, I am referring to the former sense and not the latter.

And one thing that I will be suggesting today is that I am open to the latter. That is to say: though I do not expect anything like the GFC or the dot-com bubble bursting, I am open to some further lows ahead that may even put the S&P 500 in a “technical” bear market.


To begin, I would like to look at the basic structures on $BTC. Where liquidity flows, so flows the Bitcoin candles, and it’s far easier to use technicals on a single chart like this than to try to do so on a complex of variable risk bonds or something like that.

Some general notes:

  • It has the appearance of two, consecutive head and shoulders patterns
  • The top of the one on the left coincided with the beginning of the decline of all the high growth names
  • The top of the one on the right coincided with the top of the Nasdaq
  • Thus, if we can draw some conclusions about this asset’s future, they may assist us in predicting the course of equities

Now differences between the two head and shoulders patterns are interesting:

  • The right shoulder of the one on the left never seriously broke down below its respective neck line; the right shoulder of the one on the right did
  • The right shoulder of the one on the left developed into a falling, bullish wedge; the right shoulder of the one on the right has produced (so far) a far more directionally agnostic wedge. Though symmetrical triangles are understood to be directionally agnostic (the “bullish divergence” on the RSI many believe they see is rendered null and void as no new low in price is present), following a steep decline, they are perhaps more reliably interpreted as “continuation wedges,” which gives the present picture a far more bearish look than how things looked last summer

BTC

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The $VIX, It Seems to Me, Supports the Bullish Count

A quick look at the $VIX. I believe its behavior supports the bullish count. It is failing from a series of “fan lines,” having retested the orange one from beneath, before moving lower, and then retesting the purple one from beneath as well. And so far, it has not been able to recapture them. A second failure here would coincide with a strong upward movement in the S&P 500.

VIX

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The Wildcard Here Is the $VIX

One piece of the puzzle that is not lining up for a low in equities is the $VIX.

The bullish wedge (last noted here) is still a force to be reckoned with. If it breaks out, I would expect it to reach either of the two fan lines above.

VIX

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