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Stock market turning points - are we there yet?

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Does anyone know what the markets are going to do next?  No, me neither.  However I use my methodology to identify likely turning points and assess the risk against my long term scenarios (or road maps).  As a swing trader this is an important aspect of trading, otherwise you are sitting around waiting to join a well established trend, which means wider stops and therefore greater exposure to loss; or you are trying to jump on a sudden move (day trading), which is not a long term swing trading approach (usually because we are not glued to the screens all day every day).  I prefer to take on a small exposure several times and even seek to take that exposure down to zero, which is what I did the other day on the US indices (see my thread on US Indices, the big one).  Others prefer a different approach that works for them, which is perfectly fair and not for me to criticize.  People often talk about bias as a bad thing.  This I disagree with for several reasons but chief among them is that everyone has a bias all the time.  The key is to be sufficiently self aware to recognise your inherent bias and guard against throwing caution to the wind off the back of this.  For me this bias is that the market has (or will soon if Oct 2018 turns out not to be the top) shifted from the runaway Bull to a Bearish footing and that this will be the beginning of a massive Bear move that will last several years.  I don't mind being wrong so long as I don't lose much in my efforts to find an entry to capitalise should I be right.  All of the top traders who people quote and defer to take positions within a premise (whether Technical or Fundamental or both or even from a valuation perspective for individual company shares) for what is going to happen next.  This is a bias.  Therefore, for me, the only way to make some serious capital gains on trading is to do exactly that.  Of course this is a long term swing trader view point.  I daresay day traders can simply bend with the wind each day, but I am not a day trader so can't comment on that.  When you are engaging in a discussion around trading it is important to know the people you are doing so with in terms of their trading type.  I don't listen to day traders because I don't day trade, not because they are wrong.  It is just wrong for me and my method.  If you listen too the wrong kind of people you will undermine confidence in your own methodology and if you don't have this you cannot be successful.  BTW, even if you have all that you can still lose money if you do not practice tight money management.   With all of that it is no wonder so many retail traders lose...

A couple of other observations/saying that are relevant to this topic:

  1. Buy low/sell high - well we are about as high as we can be on indices right now
  2. The trend is your friend - yeah until the bend in the end!  If you do not have a methodology to identify this inevitable bend then not only do you lose out on opportunity you also hold onto old trend positions far too long based on the original bias, resulting in impaired gains and at worst gains tuning into losses.  This turns into the opposite of saying #1!
  3. Buy weakness, sell strength.  Indices are seemingly strong now but are they really?

So within that context (and let's hope no one feels the need to argue about that!), here is my case for stock indices turning back into a bearish phase.  I currently believe the top was hit in October (my bias).  Unless or until we see a fresh high high that position I will retain.  The problem we have is that after such a strong Bull market it will not turn Bearish without a fight.  The Bulls almost cannot conceive of a situation where the current bull market will end.  There are plenty of examples of people talking up the market.  Given this backdrop a retrace move (i.e. the long breath before the plunge) could go all the way to a double top formation.  Therefore my approach is to assess each resistance zone as it is approached and watch for a trigger.  When a move down is a trigger, according to my method, I take a position with a close (low exposure) stop.  If I see the move flame out I exit or move stops to break even (or there abouts) to guard against a reversal, which is what happened end of last week on US indices. and begin the process again, with little or no loss.

So where are we?  I see all major indicies at key resistance (potential turning) points (see below), with the additional indicator of strong Negative momentum divergence and other oscillators in the over bought zones.  I see a credible EWT  A-B-C formation.  On the hourly I currently see a small 1-5 down and now in retrace.  If we get a small A-B-C up followed by a bearish move down past recent lows that will form a lower high, lower low combo.  If we also see a breakout of narrowing channels we may be on for a bearish period.  However I cannot say whether this is the final retrace before the big one (quite likely with the Dow at Fib 82%!) or a wave A resulting in a further wave B-C to May time.  But before I worry about that I want to see the first turn and get in on that:

 

Major indices on the Daily look like this:

  1. The Dow has almost reached the Fib 82% at a significant turning point from Pre Christmas.  We saw a strong Bearish move from this point pre Christmas - markets have memories!  Also a significantly narrowing channel and NMD suggests the power of this move is waning.
  2. Nasdaq looks similar but falling between Fibs 62% and 76% but at a key resistance zone nonetheless, being the long term channel breakout zone.
  3. S&P is again similar but this time right in the Fib 76/78% zone, which is also a key turning point 3 times prior to Christmas.
  4. Russell2000 is almost identical to the Nasdaq (both are momentum stock heavy)
  5. FTSE is weaker, having topped out earlier and is appears to have already turned at the Fib 50% zone, again coincident with the long term channel line breakout zone.
  6. The Dax is the weakest of all the Western markets, having topped out first and is only making it to the Fib 38% at present and again coincident with its long term channel breakout zone
  7. Finally the Nikkei, which is on a different route map having topped out in the late 1980s but topped out the current Bull run in Oct, same as for the US markets and like the FTSE100 has only achieved the Fib 50% on the current retrace.

 

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If USDJPY is any kind of leading indicator for for stock indices then the current movement is interesting...

 

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As far as the original question is concerned, a lot of charts similar to this are being posted in various forums. There is clearly a lot of emphasis being put on the arrowed line, clearly  price is reacting to it at the moment. Some consolidation here then maybe a continuation higher

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Here is my version of the big picture on USDJPY @elle, I have a similar line but notably there is an area of resistance where this market has turned a couple of times around the Fib 62% and this zone runs through a Weekly gap (already closed but a chartist loves zones of resistance or trend-lines that run through such historic gaps.  I really don't have a good LT view on this pair but the Yen does seem to strengthen around stock indices weakness, hence the question.

 

On balance, re stock indices, I am probably leaning towards a a bearish move followed by a further Bull move to complete a complex extended retrace through to early Summer but of course can't be sure of that yet so have to consider that any turn could be the final nail in the Bull coffin.  Also, naturally, cannot 100% rule out fresh all time highs so care is required to guard against such an event in terms of stop placement and judicious profit taking.

 USDJPY-Weekly_260219.thumb.png.41e5b926c23ebb00e8e9f7c7ab1b7a2f.pngUSDJPY-Daily_260219.thumb.png.f1d7ede7dda28b80b0ec4f4a16673a69.png

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On ‎26‎/‎02‎/‎2019 at 20:14, elle said:

a bigger picture  ...

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going up

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Or USDJPY set to go down?  Coming up on a strong resistance zone.

As regards Indices looks like there is a strong case for a retrace rally end this past hour or so with a significant turn at key resistance on the Dow (similar pattern of others).  Not confirmed yet but the signals remain in play for me.

Need to watch the closing stages of the US session this evening for more clues.

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Dow Hourly shows the 1-5 down to a potential wave 1 and the A-B-C retrace with turn and strong bearish move off key resistance.

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Stock Market Turning Points, are we there yet  -      @Mercury, as the saying goes,  "saw this and thought of you "

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Ha!  Thanks for that @elle all grist to the mill I guess but like you, I trade what I see.  I needed to see a Bearish end to the week and we didn't really get that, out of hours trading on FTSE, Nikkei and Dax was overly strong vs the live US indices.  However the Dow, which is my main vehicle, is still showing a failed retest of my channel line.  I would be a lot stronger on this set up if other indices were showing similar reactions but they are not, especially the Nasdaq.  In the case of the Nasdaq it could be on for a double top, which is consistent with the Bulls not being able to give up the belief that the central bank fueled run will go on forever ("The new normal").

I will await Sunday opening with interest to see if we get a Bearish start to the week or fresh highs on this rally (another leg up).  

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There has been a lot of chatter about the Bullish nature of the stock indices and about bias etc.  As a Contrarian I love that.  I also use the COT differently as a result, looking for a lob sides bias in the market place.  So far it looks like the Dow (and other US large caps) are leading the way down.  The Dow is my main vehicle and turned without making a higher high and has now broken the narrowing channel support line with some force and closed below key support zone on the hourly chart.  We could see some retrace rally action in the run up to the close today and I will be awaiting the end of day position on the daily chart to assess whether this is a confirmed turn. but so far it looks good.  The key for me was to get Short early, which I did once again at the wave 2 turn on key resistance and on breakouts of the channel lines.  The Sunday evening opening Gap was a key factor for me in determining a Short trade as I felt reasonably sure this gap was not a breakaway and so would be closed.  One it was closed I narrowed stops to guard against a reversal (the kind of thing we have seen at the other resistance points on the rally up so far).  Thankfully the market carried on down.  At this point I will be holding my Shorts stop protected at break-even and deploying a sell the rally strategy until I see signals of another medium trend reversal OR a break of the Christmas low, whichever presents itself.  Obviously in the case of the former the indicted action will be to cash Shorts and swing Long and in the case of the latter hold for the long term.  First though we need to see a confirmed trend change.

Some interesting factors for technical traders to note:

  • Dow didn't make a higher high but Nasdaq and SP500 did.  FTSE100 has been weaker, making a turn 15 Feb.  Dax and Nikkei have turned at much lower levels that the US large Caps, which have also turned at different levels (Dow being the strongest making it all the way to the Fib 88% or thereabouts).  This divergence but turning at respective important resistance zones is instructive.
  • Oil and precious metals seem to be in congruence with stock indices at present, the former in particular perhaps.
  •  
  • There were no data releases to trigger today's US indices turns...
  • There was no material news that I can see, although I expect the usual attempts at post hoc justifications. 

Whatever you views on all that there is no denying that a turn looks likely, subject to today's closing price action.  Dow 1 hour chart attached, similar read on others but the Dow (and Russell 2000 actually) were first to go.

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Nasdaq is setting up nicely for a strong bearish move, as are the other US large Caps.  In the case of the Nasdaq through the recent relief rally was stronger, penetrating back through the channel line to top out at the Fib 78%.  This was coincident with the top of the prior gap, a zone that supply/demand theory would have as a strong buy/sell point.  The theory goes that a gap leaves traders behind and when the gap is closed this traders will dive in.  In this case the bearish move was fast and strong, closing the gap with little chance for traders to get in.  The relief rally topping out where it did offered those traders the chance to get in.  Looks like they were predominately Bearish...

I am particularly keen on these types of set ups where several methodologies combine to show the same result.  For me this adds credence to my Bearish stance at this juncture.  I am anticipating a fairly substantial drop from here.

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Russell2000 makes new lower lows and breaks support zone.  This index can be a it of an advance indicator for the large caps, it certainly looks like it this time.

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US indices are at or have broken near term support zones.  Given the nature of the bearish moves I am viewing this as a trend change.  I am not saying pile in, markets move in zig zags as we all know.  I am Short from key breakout points and stop protected at Breakeven.  I will be looking to sell into rallies at key resistance zone turning points with close stops above those turning zones.  My medium term targets for this move are around the Fib 62% or 76/78% support zones.  Depending on the nature of the move and the sum total of signals at these turning points I will assess whether a swing or hold approach (or indeed a split approach) is indicated.

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Are we there yet?  I think so but it is not yet conclusive.  The turn on the Dow occurred just below the Fib 88%, which was a very strong retrace rally indeed.  However all the signs of the turn were there with a pin bar off the upper narrowing channel line and then a lower high retrace (where I went short).  The Market then broke out of the channel to the downside (another bearish signal) and went on a strong drop that stopped after bad economic news (US NFP), hmm...  There have been some minor divergences on shorter time-frame charts, a signal that the trend is weakening.  However that strong late reaction rally suggest a further retracement is likely before the next phase of the bearish move.  I suspect this retrace may carry as far as a retest of the channel breakout.

Of course no one can 100% discount the marketing over exuberance continuing to a new all time high but I don't see that as the highest probability scenario at this stage, there are too many economic headwinds for me.  This is my scenario 3.  The other 2 scenarios I have in play are:

  1. this will be a drawn out struggle between Bulls and Bears that will drive a so-called complex retrace with a lot of whip lash (we have certainly had that so far) before the Bulls will eventually realise the game is up and then we turn into a massive wave 3 down
  2. The game is already up and the turn down into the big one has just happened

Time will tell, for now I remain Bearish, I will hold my Shorts and await events.

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See a recent article posted by the same Cramer @elle was referencing I believe, posted below.  I won't comment on it except to say 2 things: one, without a lot of talking heads talking up the market at turning points I would be nervous - contrarian turning points can't be mainstream; two, the idea that anyone, any institution, can control (or cause) a recession or a boom is total nonsense (Gordon Brown discovered that the hard way).

Humans love to explain stuff (to rationalise); feel they can control their environment and, chiefly, seek to blame people for bad things (It must be someones fault or else things are too chaotic to comprehend - well they are, that is what chaos theory is all about).  

In reality, I believe, it is group think and herd mentality that causes booms and busts.  And this is driven by the above mentioned human desire (need even) to rationalise.  What institutions like central banks CAN do is amplify the cycle by intervention.  Americans are the ultimate purveyors of the so-called free economy but the level of intervention since Greenspan (not just Bernanke) is hardly a free economy.  This intervention, which is now a global phenomenon, has staved off the crash and reset that some believe ought to have occurred as a result of the credit crunch and amplified the resulting boom to bubble proportions.  The inevitable bust will be, as a result, much more painful that it would have been in 2007. In fact we might now be touching bottom and beginning to come out of it but instead we may have 10 years or more of depression to content with.

The reason people like Cramer et al have a ready readership as no one wants to believe what I have just written above, it is too awful to contemplate.  OK believe what you want to believe if it make you feel less emotionally fragile but surely the logic of it as a credible scenario would lead you you plan for the worst..?  As for me I plan to take full advantage of the Bear when it comes in my trading account to offset other impacts elsewhere, why wouldn't I?

https://realmoney.thestreet.com/investing/stocks/jim-cramer-it-is-time-to-burst-the-fed-bubble-thesis-14862451

 

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Not sure I could be quite that definitive at this stage.  Nasdaq and SP500 have made new highs on the current rally while the Dow has not.  The Dow was much stronger in the previous phase so we are seeing a lack of convergence between the US majors.  In addition the Russell 2000, a bell weather for momentum stocks is tracking similarly to the Dow, having not made a higher high in this rally yet.  

I couldn't call which way this is going to play out next week but the stock indices do seem to be at a pivotal point just now.  A turn down on Sunday/Monday would trigger a Bearish phase.  A turn up would not necessarily trigger a resumption of the Bulls until key resistances are broken.

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Looks like a small final leg up to critical resistance and now a sharp (1 hour chart) bounce back off that resistance.  Not yet confirmed with support breakouts but shaping up for a classic ending diagonal/triangle set up.  I often take a speculative Short (or Long in reverse set ups) off the touch and go at the potential Triangle top, which I have done here, then fast stop protection move to minimal loss positions and await developments.  Another opportunity for a short is the breakout of the lower narrowing channel line.  One of my key leading indicators for US large Caps, the Russell 2000, is flashing Red as well.  All in all this is performing exactly as my Bearish scenario lays out.

 

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The aforementioned Russell 2000.  Not 100% conclusive but highly indicative for me.

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Another corroborating indicator to watch for me is the Yen (stronger in flight to safety, generally).  Of late USDJPY has been showing signs of weakening and continues to do so today.

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On ‎16‎/‎03‎/‎2019 at 13:35, elle said:

Next leg up

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key level, right now

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@elle,

Your charts have been bang on the money so far and has influenced a change of thought for me. You called the pattern we have witnessed a while back so well done for that. 

I actually followed your charts on US indices and though I could not see it at the time (hindsight is a wonderful thing) I can see your thought process better now. I think from memory you posted a chart of how the Dow has behaved previously on such large drops during this long term bull market in US stocks. Past behaviour can not guarantee future price behaviour but this pattern has played out like you envisaged.

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Nearly there!  At least in terms of the market finally revealing its true nature.  The rally off the Christmas low has been very strong; strong enough to turn many of the perma-bears and MSM copy back to Bullish with Bullish sentiment back at "Greed" levels again.  Check out the article below from CNN for an example.

https://edition.cnn.com/2019/04/05/investing/stock-market-ahead/index.html

Bulls will read this article as confirmation for them, they may be right, at least temporarily, but the article doesn't address the following points for me:

  1. Why has the Fed turned dovish again?  Could it be fears about a slowing global economy and getting the blame for a crash by raising interest rates?  The Donald is certainly position for this...
  2. "Some concerns remain. There are still questions, for example, about how much markets have priced in what is set to be a disappointing round of first quarter earnings."  Well how could that be priced in?  The markets have rallied...  And are nearly at all time highs again!
  3. "Earnings for S&P 500 companies were expected to decline 4.1% as of Thursday, according to FactSet. If this happens, it would mark the first year-over-year decline in earnings for the index since the second quarter of 2016."  And yet, "Analysts generally believe that companies have adequately managed expectations, and markets have already baked in weaker numbers."  Wait a minute, the article just said there were concerns about this.  And if they had baked in such a decline how come the markets have rallied?  Surely earnings drive price?  Ah!  maybe therein lies the problem...
  4. "most market analysts expect stocks that perform well in a strong economy will continue to do well throughout 2019."  Err why?  Are they expecting a continuation of a strong economy or are they saying said companies will perform well in a stagnant or deteriorating economy and if so why?  Could it be financial engineering?  Does they mean company share prices will perform well or company earnings?
  5. "A so-called yield curve inversion, in which short-term rates jump above long-term rates, has preceded each of the last seven recessions.  Many investors are brushing aside the flip. [...]  "It tells us what we already know, which is that a recession could come in two years," said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management's Chief Investment Office. "The markets could still perform quite well before then."  Could is the operative word, they have no idea when they just know it will come so they kick the can down the road.  But hold on, earnings are falling, err...  Or course analysts are not paid to encourage investors to get out of the market...
  6. "Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the divergence between rallying stocks and depressed bond yields may have an easy explanation. Maybe it's "just as simple," he said, as the flattening of the bond market curve reflecting the current slowdown. He added that the stock market may just think these issues are temporary, and a "rebound in growth" is coming soon."  Maybe?  May?  He doesn't know, no one does.  What if there is no rebound in growth?  Earnings have been under pressure for quite some time and Corporates have emptied their war chests propping share prices up for a few years now.  And by the way, nothing in the financial markets is "just as simple as..."
  7. "The consensus view at present seems to be that US economic growth will slow but will not go negative 2019. and the second half of the year could be stronger economically than the first."  In financial forecasting circles we call this the "hockey stick" forecast.  It rarely, if ever, comes to pass.  "Seems to be"?  Well is it or is it not?
  8. "JPMorgan Chase CEO Jamie Dimon said,  Employment and wages are going up, inflation is moderate, financial markets are healthy [under what measures I wonder?], and consumer and business confidence remains strong, although down from all-time highs."  But markets don't always reflect real economic conditions, and volatility in the fourth quarter may be a "harbinger of things to come."  Well at least he hedged his bets a little right at the end...  Hmm, maybe he is not so all fired bullish after all...

As a contrarian I love these kinds of articles.  I need to see them to be confident a turn is on the cards.  This is a critical indicator for me, not to trade but to get ready to pounce on any likely move that triggers all of my other indicators.

So much for that, what about the only thing that matters, market price movements (Dow, SP500 & Nasdaq charts below) - this is a case for the Bears, I'll leave others to make the case for the Bulls:

  • Weekly charts are looking like a possible symmetrical Head & Shoulders may be on the cards (LS/RS at same price zone), IF price turns back next week.  Looking at the LS back in early 2018 a sharp weeks rally was immediately reversed and exceeded the following week (Sell strength was the order of the day back then, will it be again on Monday?)
  • Daily charts continue to reflect a very significant negative momentum divergence (Also on RSI and Stochastic) with a retest of the narrowing channel breakout off the all time high underway.  Dow ended Friday with a drop to a rising Triangle support line and a Daily chart pin bar, that could turn out to be a reversal signal.
  • There is an un-closed gap below and the whole of the move since before the Christmas Bear is peppered with gaps, all closed, which is a sign of volaitlity and agitation in the market for me as Bulls war with Bears.  I see no reason to expect the current un-closed gap to remain so.
  • There was a Death Cross (50MA cuts 200MA going down) during the pre Christmas anti-Santa Claus rally (🙄).  This has now been reversed but this often happens before a second Death Cross that is the true harbinger of doom.  The driver for this is a large scale EWT 1-2 retrace, and we may have had a huge one now.
  • On the 1 hour chart the Dow is knocking on the door of a Triangle breakout to the downside.  However SP500 and Nasdaq are not.  Divergence is another sign of that market agitation I was referring to above in the context of price gaps.
  • The Nasdaq is a bit more buoyant that the others and we could see a double top (i.e. a slightly lower low) on this one before the end.  Any turn between where we are and the previous all all time high is an effective double top for me.

So that's case from a Contrarian Bear but the market will decide in the end, all I aim to do is be ready to react to confirmation of my signals and set ups.  Setting up to be an interesting week or two, be careful out there!

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"Sell in May and go away."  This is a saying from yesteryear when markets were physical open call and wealthy people took the whole Summer off.  Might be true this year though but for different reasons.  However the end of the saying about coming back after St Ledger day (a horse race in September) would not be as this would likely spell the end of the Great Bull in action since the late 1970s, ultimately driven by easy money creation via debt once the USD was allowed to float free of a peg to a gold standard.

All the US large caps are showing a similar pattern in that the price action since Dec 16, 2018 in that it is contained within narrowing channels and fits a classic 1-5 EWT form.  If this holds then looks like these markets are in a final wave 5 of a final wave 5. Massive negative momentum divergence has been building since early Jan 19, this seems to be a reluctant rally from a momentum perspective.  With a long term resistance trend-line, that has been in place since the 1970s, incredibly, within spitting distance.  The confluence of that long term trend-line and the shorter term channel line from Dec 18 is a critical juncture and at current trajectory this looks to be set for a test in May, maybe mid May.  The key here is not just whether price is repelled from this zone OR breaks through it but whether a bounce back also breaks out of the narrowing channel and if it breaks out to the upside whether or not this break is sustained (we could get a final exhaustion spike through and drop back, which would be very Bearish indeed, especially if accompanied by thin volumes.  We could also see a slow doming of the market that takes a while to drop off so the key for Short taking is that breakout of the lower channel line and there will likely be some chop over the coming weeks, making trading stocks difficult.

Non US large Caps seem to me to have already topped out.  I can't see them making new ATHs unless US stock power up through overhanging resistance.  This divergence between US and non US is significant I feel.

Conventional wisdom is buy low, sell high, well we are as high as we have ever been but no one seems to be talking about selling.  I suppose this time it could be different...

SPTRD-Monthly_040519.thumb.png.76feafbd0f69d951960903e0aa20ca5d.pngSPTRD-Daily_040519.thumb.png.f81a79e03a67d51e444a41cf7db1b1a2.pngDJI-Daily_040519.thumb.png.8011252da4f7b20323a43e993c1599c2.pngNASDAQ-Daily_040519.thumb.png.35a4fbad12f9dcc917d3569e350dca22.pngFTSE100-Daily_040519.thumb.png.af98af3f7a64862eb9e4910f6235a6a8.png

 

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