Stock market turning points - are we there yet?

[phillo]

S&P 500

[phillo]

6 minutes ago, elle said:

S&P 500

& close up , until it breaks it's still support

[Mercury]

Dax, Nikkei and FTSE100 remain below recent (past 2 weeks) turning points and we have seen an interesting recent bearish candle in play on US large caps, a potential spike and retrace back down, which could signal rally exhaustion.  In the case of the Dow and Nasdaq this occurred with an overshoot of the 4H chart rally channel and in the case of the Nasdaq also the Daily and Monthly long term resistance trend lines (overshoot and quick retrace being a particular signal of an exhaustion phase).  In the case of the SP500 this has occurred with a hit right on the Daily resistance trend line and rejection, so far at least.  As I have mentioned before: with volume relatively weak and seemingly in a down trend; and with COT net long positions weak and weakening (not what one would expect of a breakout rally); and with Gold/Silver rallying; and with NMD at the turn points on all markets and as USDJPY has also taken a similar bearish hit; the odds of a bearish phase are good and the risk reward is decent.

I am already Short Dax and FTSE100 off the previous turns but money where my mouth is this time on SP500, as the exposure is tiny, I am Short off the hit and turn on the daily trend line with tight stops just above.

 

[dmedin]

1 hour ago, Mercury said:

but money where my mouth is this time on SP500,

👍

[Mercury]

So yesterday turned out to be a retrace down but I was covered so no sweat.  Today another opportunity presented itself when the Dow dropped after a touch on a resistance channel line.  With the other markets responding slower this offered an opportunity to get Short at key turning points, which I am on several stock indices.  One such is the Dax which broke out of consolidation only to be hammered back down in what looks to be a classic exhaustion rally and has now dropped back into the consolidation zone.  I anticipate an drop through and out the other side (bearish direction).  As I mentioned the Dow put in a touch and drop away and the SP500 put in an overshoot and reversal and the Nasdaq looks to be responding to a Megaphone channel occurring at the end of a medium term narrowing channel.  All of these events are happening at a credible 1-5 EWT count and and large NMD.

Got to be aware of a reversal as we have seen before and likely we will see a small scale 1-2 relief rally before the next major wave lower but if we see lower channel lines getting broken the bearish phase will be on.  Once that is confirmed the next question will be is this it or will we see a Santa rally and if we do will that deliver fresh ATHs or a lower high.  All to be assessed as price action continues but first up is that channel breakout.

[Mercury]

Seems like a definitive turn has also (as well as coffee) taken place on stocks as well...  The US large caps, especially the Dow, have not put in their customary reversal, although the buy the dip permabulls did their best with the Nasdaq and SP500.  Markets are opening bearish after the hour off and USDJPY is making a breakout...

 

[phillo]

On ‎17‎/‎11‎/‎2019 at 16:26, elle said:

& close up , until it breaks it's still support

it broke ..................

[Mercury]

Agree @elle, I see breakouts of important channels across the board and importantly this has happened fairly fast after failure of key resistance points.  In some cases this has taken the shape of an exhaustion spike, which is a signal of a trend change (if proven!).  There have been some failed breakout zone retests, which is encouraging for the bearish outlook, but there is still a lot of support to get through, especially on the US large caps.  USDJPY has also broken its channel and put in a failed retest but after the Nikkei fast drop and recovery last night the Yen direction is not yet resolved.  Gold/Silver turned and rallied (or at least moved into consolidation) prior to the stocks top and drop and remain there for now.  I would want to see Gold/Silver rally some more, the Yen break decisively and the Russell 2000 break down through its current consolidation.  Main thing to look for is breaks of next level support to cement the bearish trend across multiple stock indices.  FTSE is breaking lower this morning and Dax is setting up to follow it seems.  At present my sense of the longer term is that on US large caps this is a retrace before another push but the nature and extent of the forthcoming bearish move (if we get it) will shed more light and my focus now is to manage the Shorts I have on and add if there are further break points.  On the Dax and the Nikkei the turns, at present, seem to be wave 2s so here I might expect a fairly significant drop, let's see...

 

[Mercury]

They say a day is a short time in politics, although 10 minutes of the UK election, US Presidential game show or EU un-elected bureaucratic claptrap is not short enough for me at present, but it seems a few hours is a short time in the capital markets.  Price action recently leads me to suspect we are in the throws of another retrace rally that may play out in an A-B-C retest of key resistance areas.  At this stage I imagine that we must wait for the US open to resolve the matter.  Sell the rallies is my motivation at present to add to my higher up Shorts but targeting key turns and breakouts is the key to this for me as until the move really gets going the indices are prone to whipsaw price action and even potential reversal, as we are all too used to seeing.

 

 

[phillo]

On ‎20‎/‎11‎/‎2019 at 19:49, elle said:

it broke ..................

not going down without a fight ! 

[dmedin]

@Mercury Do you agree with John J. Murphy's statement that EWP should be considered a partial solution and should not be over-relied upon?  I guess not, as you say you use it to try and find out where the market is from a longer-term perspective?

[Mercury]

3 hours ago, elle said:

not going down without a fight ! 

Never does!  Classic EWT looks for a strong retrace after a top out.  You don't need to hit the Top, such a trade is what I term a preemptive and it is ok if you don't overdo it and keep stops close.  I have a few such positions on at present and at BE stops now.  However the thing that really gets me interested is a retrace after a credible top out and turn that turns with a lower high at key resistance.  This is even stronger/more interesting if this retrace occurs after a channel breakout and that is where we appear to be at present.  I now want to see breaks to lower low across all indices, especially on the Russell 2000.  Meanwhile Gold/Silver remain buoyant and USD appears to be keeling over (not quite there yet but should resolve soon).

On the Dax I have that 1-2 retrace I was signalling yesterday, went higher than I at first thought but not to levels that might be doubt my lead scenario, yet.  I have a credible top and turn.  I have NMD at the lower high turn, which turned at the Fib 62%.  The EWT labeling is good with a 1-5 down off the top and an A-B-C to the retrace turn.  As I said we now need to see a break below 13040.  You will see similar set ups on most major indices, which is also important.  My smaller 1-2 (grey) is highly speculative and we might, probably will, see a more definitive retrace before things really get going and this may occur on higher highs for the retrace on US large caps.  That said, any further drops prior to US open could send the whole mess down fast, as we have seen before when US large caps top out on new ATHs.

[Mercury]

2 hours ago, dmedin said:

Do you agree with John J. Murphy's statement that EWP should be considered a partial solution and should not be over-relied upon?  I guess not, as you say you use it to try and find out where the market is from a longer-term perspective?

I will ignore the fact that you asked and answered your question on my behalf and assume you actually want an answer.  It is hard to divine intonation sometimes, which is why email is so divisive but I'm assuming you were not intending to be sarcastic?

I am not aware of the context of Murphy's statement, perhaps you could attach the full text or video clip if it was an interview.  I am somewhat aware of Murphy's work.

In fact I agree, and indeed I believe I have commented as such in various threads, that one single form of technical analysis, or any kind of analysis for that matter, is insufficient to base a trading strategy.  Even a cursory glance at my analysis as posted on the forum should tell you this.  I have also previously posted on the range of techniques I use and the fact that I blend them.  Again that is evident also from my posts.

Not only do I use multiple techniques across multiple time frames and use this to inform my trading trigger rules but I also practice what Murphy is famous for, which is correlation analysis across multiple markets.  That is the main reason I analysis so many markets, thought I only trade a few.

Specifically on EWT, as you mentions correctly, I do use it as part of my big picture assessment of where a particular market is in a cycle.  I also use all my other techniques in concert and add fundamentals assessments, some of which I get from professionals that are deeper into the markets than I can ever be.  I do not use EWT as a trading trigger but merely as a correlating rule that must be in place to support a trade entry or exit.

[Mercury]

While I am in a reflective mood after that coffee post I am minded to look at the perma bull argument that centres around the trend being strong.  My first reaction is, well of course it is, it always is just before the end so duh!  I looked back to the most recent similar bull market, the one into 2000 as this was also momentum/tech driven in the main and the first chart below (bull market to 2000) is interesting to me because of its similarity to the second chart below (bull market from 2009 to present).  Note that the inception of the 2000 bull was the Black Monday crash in 1987 and the current one started with the credit crunch crash.  The different being in the current bull the need for artificially created liquidity via permanent QE and ZIRP/NIRP is eye watering.  This is the recovery that never was and at some point we are going to get an "emperor has no clothes moment".

Chart #3 shows what happened next in 2000 (a 50% drop!).  Note the break of the monthly MA 20.  On the current chart MA50 looks to be the one to watch, maybe also an indicator of the extent of the asset price inflation and continuing financial engineering (or some would say manipulation) that kicks in when the MA20 is broken.  Here is the thing with stocks.  They need a reason to go up.  They don't need one to go down.  All that is required for a keel over that leads to a crash is a loss of confidence that morphs into panic (otherwise knows as Sentiment).  When there is no reason for stocks to go up they either go into consolidation until a new reason emerges or they drop until they hit a price that is deemed cheap enough with all other things being unchanged.  The internals of the indices are also interesting.  The sluggish rise has mostly been driven by defensives, with some continuing momentum thrown in.  Some commentators point to this as an opportunity for a further rally phase as investors switch out of defensives into growth, this is the basis of the continuation theory.  But some of the high yielding stocks like tobacco are clearly in a bear market, unlikely to return to their high water mark, ever!  This doesn't strike me as a balanced and "healthy" bull, more like a stamped getting to exhaustion.  And what happens if/when bonds finally crack and yield curves go up?  One of the reasons for massive buying of stocks is for yield and a bond price crash would make bonds much more attractive as a lower price and higher yield.  In the past bond markets have tended to precede a stock crash and then precede again, by some way, a recovery.

Several professional technical analysis have been suggesting diverging paths.  There are some who are going with the continuation view of another rally phase.  There are some that are calling tops but there are a lot of bearish analysts that see a final melt up first, which would allow everyone to be right except for anyone calling a top now.  I am leaning towards the melt up scenario myself but with an eye open for a fast drop from here, that may either mark the top or set up the final rally phase.  I find it hard to see a melt up that is US large caps only so I will be watching other indices for clues as we end the year.  There is a host of data that supports the bearish case and this builds with each passing month.  At some point we will get the straw that breaks the camels back but we wont know that until we have the benefit of hindsight.  The only things that seem to be driving the stampede appear to be US/China trade deal tweets (I mean not even hard facts or actual progress!) and Central Bank liquidity provision (rich keeping the plates spinning).  At some point they start falling...

So in summary my assessment is that we could see a turn next week or the week after and this could mark the top but more likely is a final correction before a melt up blow of top.  I do not see a sustained bull phase because the fundamentals aren't there, Perma bulls are betting on Trump and Powell, pretty thin gruel for me.  I will not consider trading stock indices Long at this juncture, there are better risk/reward opportunities around (emphasis on risk here).  I will wait patiently in the tall grass like a good bear and act on triggers (i.e. not try to preempt as this too is highly risky).

PS: if you look at the COT data for the S&P500 (the eMini) you will see that it went net negative last week.  The last major net positive was Oct 2018 and the Christmas recovery peaked in terms of net COT in April 2019 and has since been trending lower.  Not the stuff of Bullish dreams, but maybe this means there is a splurge to come, who knows... 

 

 

[AndrewS]

Hello Mercury,

I follow the correlations as well. I have a quantitative reason for not following the CSI300 ( correlation too low) and the EUSTX50 (too similar to the Dax). I even have a reason to favour daily, hourly and 15 minute candles.

This is what the correlations of the SPX500, JPN225 and GER30 look like over the last 24 hours of trading.

[Mercury]

Looks like we may be at another potential turning point.  The last one didn't hold for US large caps, which have just made fresh ATHs overnight BUT they did for the Dax and Nikkei with FTSE100 and HK50 remaining suppressed.  Importantly the Russell 2000 made a fresh high to a potential wave 2 off the ATH to complete a retrace at the Fib 76%.  All of these indices are turning this morning with the Dax remaining below the possible exhaustion spike level and turning at the Fib 76/68% after an A-B-C retrace pattern.  The FTSE is interesting too in that price seems to be contained within a developing Triangle consolidation after the wave 2 (purple) retrace off the ATH.  Note also both a short term unclosed gap on the most recent rally phase on most of the indices and an additional unclosed gap further down.  These gaps will most likely be filled before any further significant rally.

All of this points to a short to medium term period of bearishness before any potential Santa rally this year and then maybe we will see a resolution, one way or the other...

[dmedin]

The Russell is looking pretty darn strong to me 🤔

[Mercury]

So are we there yet?  Let's start with the Russell.  Rallies look strong just before the end.  That's why the old market saying, "sell strength, buy weakness" exists.  Harder to do than say, especially if you are a trend follower...  Since my last post this market has been flirting with the Fib 76% but on Wednesday it spiked and dropped and after 2 more attempts to push up (third times a charm, or not!) we then for a bearish candle on Friday.  With strong NMD at th Fib 76% this smells like a wave 2 turn to me.  If we see a strong bearish move next week then that may be that for the Russell as the ATH back in Sept 2018 will seem like a better bet.

 

[Mercury]

Another major market that seems disinterested in following the US large caps is the FTSE100.  Remember the ATH in this case was back in May 2018, even earlier than the Russell 2000.  In August 2019 we got a significant turn at the Fib 88% off the ATH and a very share bearish phase that looks like a wave 1 to me, that is motive and signaling a trend direction change.  What we then needed was an A-B-C retrace and lower high to confirm.  Since the wave 1 (blue) turn up the market has indeed moved in what looks like a retrace motion with a possible A-B-C completed on Wednesday last with a top and drop displaying a strongly bearish pin bar candle and backed up with a bearish candle on Friday.  Overall that produced a pin bar candle on the weekly with NMD on the Daily at the turn.  This also occurred at the Fib 62%.  Interestingly the entire move since the wave 1 turn is enclosed in a rising Triangle, which could produce one more slightly higher high and hit on the upper Triangle line to complete a A-E, or spike an overshoot to the Fib 76/&8% off the Wave 2 (purple).  This could coincide with a US large caps higher high to end the never-ending bull after a Santa rally.  For now though I expect a bearish phase for next week, at least to the bottom of the Triangle.  A break of this and the 6960 support level would confirm the wave 2 (blue). 

[Mercury]

The Dax is a bit more buoyant than other non US large caps and has been flirting with a new ATH but failed to break through the Fib 88% recently.  The ATH is way back in Jan 2018 on this one and the price action since then is consistent more with a 3-4 and rally as with the US large caps so I wouldn't be surprised if we get a fresh ATH on the Dax in line with another one for US large caps via a Santa rally.  However we may also have seen a wave 2 turn that produces only a lower high to come.  It all depends on how low the next bearish move goes and what the form is.

[Mercury]

The perma bulls are fixated on both the Fed and a US/China trade deal to support their continuation scenario.  There is a technical set up for this too so I cannot eliminate the scenario and "markets can remain irrational longer than traders can remain solvent" is another saying to take note of.  However it is the irrational part that I chose to focus on such that any break in the fragile house of cards will be the black swan.  As for me I do not think we will see a meaningful US/China trade deal at all, or at least not for many years.  The Fed will probably turn full dove again but in the face of deteriorating global economic data they will only confirm and fuel the panic.

I do not think the US large caps have topped yet, although they may have, impossible to tell at this juncture.  Therefore I remain with my lead scenario that we will see a bearish phase to set up a final Santa rally to end the bull once and for all.  The US large caps have twitched last week but have yet to show a breakdown.  early next week should clarify the issue, let's see...

I also add the China A50 for a trade deal angle.  After a double top this market seems to have put in a retrace to the Fib 88% and now turned bearish.  It may be useful to watch both the A50 and the HK50 for clues because if these markets start to drop hard I would suggest no deal is immanent.

 

[Mercury]

Ah yeah so it seems stocks really can go down as well as up, who knew...  Well over 70% of IG clients trading the various stocks indices did I guess...

We didn't have to wait for the ISM manufacturing data, although that seemed to provide a push once things got going.  The Dax keeled over after a failed retest of the daily channel line that it has previously broken, with an overshoot spike through to the Fib 88%.  Once this rebounded back below the channel line a good Shorting opportunity presented itself and with the FTSE showing a similar reversal and SP500 turning after a fresh ATH and dropping through short term support there were several trades on this morning for those with an open mind to it.

The Nikkei is on a significant support level at a daily chart channel support line, let's see what happens when the Japanese markets open...  A break here would be significant after the Dax channel break and FTSE100 resistance hold.

The ISM data release produce a small price gap, which may get filled, at least on some indices, before a continuation of the move but maybe not.  There are still several un closed gaps below, which I expect to be filled before any next stage rally and then we will see...

 

 

[dmedin]

56 minutes ago, Mercury said:

Ah yeah so it seems stocks really can go down as well as up, who knew...  Well over 70% of IG clients trading the various stocks indices did I guess...

 

If it was easy to buy dips and sell rallies everyone would do it.

Turns out buying a broadly diversified portfolio and holding on to it is the only chance retail clients have of not losing all their money ... and beating the 2% savings rate.

Sad, but true.

[Kodiak]

VIX (ig-style) and DOW

Not that i am holding my breath waiting😁

 

 

[Mercury]

Vix has broken out just as it did the last 2 times we got a sharp bear move on stocks @Kodiak.  It is more confirmation that we are set to get a persistent bearish move for at least the week to come.

Longer term, regardless of whether this is the end or there will be another leg up on US large caps, the DJTA is not looking too happy having topped out back in Sept 2018 and now turning lower too.  Note the collapse in volume on the EFT.  Doesn't bode well from a Dow theory perspective... 

Note also the volume profile for the SP500.  The spikes in volume are all on bear days, otherwise the trend is down.  Add to all that the fact that each time the US large caps make a new ATH they get smacked back down into the consolidation range.  This will be the fifth time if price makes it back into the zone.  When you look at it from this perspective and consider the current rally phase has staged a breakout through very long term resistance and now looks set to return below this again it looks like this could be the melt up some have been calling...

[Mercury]

Overnight we saw a bounce off the daily channel line on the Nikkei, which then rallied to close the gap but turned at the Fib 62%.  Great place to get Short, which I did, especially as I saw the Yen strengthen ahead.  Setting up for another test of that lower channel line.

Meanwhile the FTSE100 appears to have got it right and continued to trade down while the Dax buy the dips boys made another attempt at BAU, some people can't give up on the never ending bull bias I guess, even temporarily...

Gold and Silver is rising, as expected and I would also expect the Dax to keel over soon now that its gap is also closed.  US large cap gaps present a bit of a problem but some of them (the Dow in particular) look too far up to be closed any time soon.

[dmedin]

13 hours ago, Mercury said:

The spikes in volume are all on bear days, otherwise the trend is down

 

Look at the huge swings back up almost immediately after each drop.   There's algorithmic trading for you.  The only lesson I can take away from this is, 'buy and hold' because even the pros can't call the tops or bottoms.

[dmedin]

3 hours ago, Mercury said:

Meanwhile the FTSE100 appears to have got it right

The FTSE is clearing tanking

[dmedin]

Surely the highlighted portion was the top, look at how large the price decline was?

[Mercury]

So is that all the bears are getting?  I doubt it.  Looks like the "positive" German PMI Services reading is cause for the Permabulls to buy the dips on top of the positive German Manufacturing PMI print on Monday.  But hold on!  The Manu print was a "massive" 0.3 above consensus but still below 50 (44.1, a long way below 50) and the Services today was a "massive" 0.2 above consensus (51.7, still above 50).  German is an economy dominated by manufacturing and heavy engineering and if you look at the trends on both metrics it is down.  In between all of this we got poor US manufacturing data, which sent the markets down on Monday.  ISM services for the US and ADP coming up, let's see...

On the technicals, just looking at the Dax, the sharp drop could be the same kind of "correction" we have seen previously except that oscillators are yet to hit oversold on the daily charts as they did previously.  Also we have a breakout of the daily channel.  At present this looks more like a relief rally to me off 1H PMD at short term support, which is exactly what one would expect for a short term wave 1 turn so I would be looking for a top out retrace (A-B-C) at key resistance across the board.  Perhaps ADP but more likely ISM and US open will tell this tale.  For me there is more to go on this bearish phase before we maybe get that Santa rally (or maybe not..!).