Stock market turning points - are we there yet?

[Mercury]

We may be seeing the "Year of the Bear" (my prediction for 2020) start very early, which is what I was projecting based on both the technicals and the deteriorating economic data.  With ISM manufacturing out today and ISM non manufacturing and US NFP out next week there is plenty for the perma-bulls to worry about.  Surely this can't be profit taking, as this would have occurred prior to the end of the year with traders and their companies seeking to lock in profits to fuel their bonuses..?  Doubtless there will be the usual diet of "healthy correction" diatribes but I can't get with the rhetoric of a market fall being healthy in any way (just a euphemism for clearing out the losers).

Still it is very early days on US large caps but they are putting in a particularly bearish candle today (if sustained), as is the Dax.  Possible ending channel being posted on the Dax, after a lower high vs the ATH, also but that remains unproven.  However if you look at the Russell 2000 (a momentum stocks index and therefore indicative for the main driver of the bull market) and the Nikkei and the FTSE100 you see a clearer bearish set up as follows:

• The Russell 2000 posted a lower high than its ATH (similarly to the Dax so far) and is breaking out of a daily chart narrowing channel with NMD at the turn.  A smaller 1-2 has been posted (not marked on the chart below but easily visible), which would mean that a wave 3 has commenced, and the strength of the move so far supports this.  Oscillators are heading down out of overbought suggesting there may be much more room for this bear move.
• The Nikkei has also posted a lower high wave 2 (purple), note all of these markets have risen to the Fib 88% to post these lower high turns but in this case price has broken out of the daily channel and put in a failed retest of the channel and now is dropping away (very bearish set up).  Again there was NMD at the turn and oscillators are heading down out of overbought.
• On the FTSE100 things are not yet as fully developed in this phase, similar to the Dax, although the Dax has dropped hard this morning after the Nikkei capitulation over night.  On the FTSE we see another lower high wave 2 (blue) at the Fib 88% and importantly this is the second one as the previous high was also a wave 2 (purple) turn at the Fib 88% off the ATH.  This puts the FTSE100 ahead of the other majors in terms of the bearish scenario.  A smaller scale 1-2 is in progress (not market up yet) and if price breaks lower then this could confirm the prognosis for a bearish phase that could eventually be confirmed as a major bearish market turn...

Overall the signs are good for Bears but we must await US open and a likely relief rally first, which if it turns with a lower high on the US large caps will be more compelling for Bears and a good entry point for Shorts.  USDJPY has also dropped through a key support zone and Gold/Silver have rallied strongly, the former approaching the previous high resistance zone.  It will be important, I feel, to watch all these related markets to spot turn and breakout confirmations in correlation and as such high confidence points to trade.  For the record I am Short the Dax and the FTSE100 and USDJPY and Long Gold/Silver.  I will await that pull back relief rally on US large caps before considering any Shorts.

[dmedin]

7 hours ago, Mercury said:

Surely this can't be profit taking

I think it could be, and the killing of some terrorist leader in the Middle East was just the kind of flimsy excuse the algos needed to start the 'cashing in' process.

[Mercury]

15 hours ago, dmedin said:

think it could be, and the killing of some terrorist leader in the Middle East was just the kind of flimsy excuse the algos needed to start the 'cashing in' process.

More fear then than profit taking.  Fear is a greater motivator than greed, which is why stock markets fall faster than they rise, and offer great opportunity for those whose bias for the never ending Fed put does not lock them out of spotting those opportunities until too late.  Personally I don't care too much what the short term motivators are, just whether the move will be sustained.  At these valuation levels it really does take much to disrupt confidence in the Bull.  However poor economic data (the ISM Manufacturing release yesterday for instance) is still not producing the impact one might expect.  This speaks to extreme complacency that the Fed will always be there and the bull will run forever.  Such complacency is the stuff of contrarian dreams...  Last week was a bearish week if we get another next week that will make breakouts across the board, Nikkei is already broken to the downside.

[dmedin]

12 hours ago, Mercury said:

Fear is a greater motivator than greed,

There's too much vested interest to allow the big U.S. indices to post large, continuous drops.  They will always keep rising and rising as long as the USA is the world's number one.

 

[Mercury]

23 hours ago, dmedin said:

ey will always keep rising and rising as long as the USA is the world's number one.

🤣

[Mercury]

So US NFP comes in off consensus but no one is posting saying "bad miss" because it doesn't fit the never ending bull story...  Data release was in the red across the board.  Shouldn't markets be tanking?  It is hard for perma bulls to change their bias, few it seems are swing traders.  Of course the US is actually open yet so let's see...

A few of things to note:

• The Dow is at the top of its very long term channel and with significant NMD on most, maybe all, chart timeframes.
• The Russell 2000 has failed to break back into the daily channel 3 times now and is turning back down.

[Mercury]

Decent chance of a Bearish phase on stock indices after a red candle day on Friday post US NFP.  With ISD manufacturing also turning more negative only ISM non manufacturing is hold this market up it seems, that and betting the farm on the consumer, not a bet I would be comfortable with...

At this point it is impossible to tell if this is the top of the market or a possible wave 3-4 retrace or yet another buy the dip in the never ending bull.  For now it is sufficient to watch for a confirmation of a bearish phase and get Short if the opportunity presents.  I am already Short off the top as the turn at the long term Dow upper channel line (similar on S&P 500) was sufficient for a speculative Short as all my signals has triggered.

Looking at the Charts:

• As mentioned, the Dow has turned yesterday right on its long term channel upper line and with a small overshoot on the daily chart nearer term channel line (now back within both).  This also occurred with strong NMD and a credible EWT count to a wave end (could be end of the 5 could be end of 3 (pink), which would suggest 1 more leg up).
• On the Dow 1H there is a nice bearish move that is currently shaping up as a small 1-5 down.  If this completes with an A-B-C and a lower high then we at least have a wave C down to come and possible much more
• As I have suggested before, it is hard to spot turns in white space but only US large caps are in ATH territory.  Much easier to spot counter trend moves.  On the Dax, Russell 2000 and Nikkei we have seen strong retraces to possible wave 2 (purple) counter trend rallies to the Fib 88% area with strong NMD at the turns.  The Nikkei and Russell seem to have broken daily channels and put in multiple failed retests before yesterdays move down.  The Dax may be describing an ending channel with A-E count.

All-in-all the signals are strong for at least a bearish phase, if not a bull end (assessment on that will have to wait for more price action).  Markets tend to turn down with a recession but the point the perma-bulls tend to omit in talking up the market is that recessions are always called many months after they have occurred and have little or nothing to do with GDP.  So just as we cannot tell if this is a top from price action and technicals we cannot tell if this is a recession yet.  Hindsight is a wonderful thing, if you want to catch the top then technical analysis is the only mechanism IMO, although many fundamentals traders like Soros and Druckenmiller are bearish too.  You don't have to catch the top of course as there will be a relief rally or two that will offer later opportunities.

 

[Mercury]

My current thinking on stocks (as per my post above) is that a bearish phase is more likely than not but the technicals are not clear on support for this being THE TOP.  On his apple thread @cheviot suggested an unconventional wave 4, I have seen this proposition elsewhere in EWT circles for the US large caps as well.  Personally I avoid using these more esoteric set ups because they are rare and only truly visible after the fact.  Using them in advance can mask a more simple solution in the opposite direction (i.e. against the bias of the unconventional set up).  It is important to be aware of your bias and guard against it clouding trading judgement.  However the unconventional set up may yet be proven correct, we just don't know yet.

So that got me thinking about what we do know (or can at least have some confidence of).  If I look first at the Nasdaq long term chart, something I do from time to time to stay out of the weeds, I see some interesting "facts" as follows:

1. The first dot.com bubble produced a crash of over 80% and the current bull market had almost doubled that peak!  While the Tech is much better now I think a lot of the new entrants are in a similar position to the first dot.com hype companies in that they are over-funded by speculators, loss making and with an unproven business model.  The traits of the first bubble were listing to exit, sound familiar?
2. The pre credit crunch rally did not push the Tech stocks like it did conventional stocks, probably due to the Dot.com bubble hangover.  However the crash again produced a more than 80% drop but in the case of the Nasdaq this was just a wave 2 retrace prior to a massive rally.
3. To me there is a clear wave 3-4 as well, which means, according to EWT, that the market is now in a final wave 5.  However EWT cannot tell you when the wave will end...  We can say that all oscillators are over bought and the RSI is in divergence with price and as with all the indices at present, there is NMD on the daily chart.
4. If history repeats (or rhymes as some people like to say...) and another 80% plus drop occurs, well...!

Looking at the Dow weekly and daily charts I am seeing the following:

• I retain the conventional wave 3-4 (purple) labeling on the weekly and the rally price action is not conventions so far but then again the rally from wave 4 (pink) to wave 3 (purple) is also unconventional.  I have a provisional supporting trend line (grey) and the horizontal support at the wave 3 (purple) is also going to be important I feel.  That very long term resistance trend line, which is the top of a long term channel, is providing resistance at the turn yesterday.
• For Wychoff Theory fans, this could be setting up as a so-called "Spring" which if it breaks below significant support would then be followed by Distribution and Throwback phases.  This is aligned to a wave 1-2 in EWT after a trend change.  I think the wave 3 (purple) level could be important for Wychoff theory.
• Things get interesting and more complex on the daily chart and produces 2 bearish scenarios as follows:
  1. The unconventional wave 4 set up would suggest that the current rally is a wave 5 of larger scale wave 5.  The EWT labeling is supporting of an end of bull turn, which is also supported by that LT channel top line.  Oscillators and NMD also support a bearish move.  I would need to see a break of both the wave 3 (purple) horizontal support and the daily chart channel line (Dark blue) to be more comfortable with this set up.  Note that currently this potential Wychoff support zone is coincident with the MA200 and the MA50 is coincident with a shorter term supporting trend line (light blue).
  2. The more conventional scenario (from an EWT perspective) is set out in the pink labeling such that the current top would be a wave 3 (pink).  If this proves correct then another leg up is indicated as the market puts in another 3-4 retrace correction.  In this scenario the final wave 5 (purple) could still be contained within the LT channel, just occurring a little later.
• One additional aspect that is a bit murky is the COT data.  Currently both the commercial and non commercials are in a balanced position with the non commercials marginally more bullish.  This is not what would be expected at a major top but it does show that many traders are unconvinced by the never-ending bull story.

In summary then I am minded to prefer the #2 scenario above where by we will see a shape correction, similar to those we have seen over the past year and a half or so and then a final rally, that may draw in the hold outs and push the COT data to a more contrarian level.  This would then be in keeping with the end of 2019 wild forecast projections for more of the same in 2020.  However I will keep an eye on the #1 scenario and those key support levels as I am close to 50/50 probability on these two.  One thing I am convinced of is that either way a period of bearishness is indicated.

I am Short off the top and turn on the Dow, Dax and Nikkei and stop protected with small exposure.  I am looking for a short term 1-5 down followed by an A-B-C relief rally and then a strong bearish move next.

[cheviot]

4 hours ago, Mercury said:

I am Short off the top and turn on the Dow, Dax and Nikkei and stop protected with small exposure.  I am looking for a short term 1-5 down followed by an A-B-C relief rally and then a strong bearish move next.

I think that the Dow on an hourly did a B top/.....Low volume , not much interest, and was clearly a 3 wave bounce off the New Year low and the drop to 3180 overnight , which was B of B.   

In effect we have a 4 th wave triangle which has created the 5 th wave to 3284 or so. 

Taking the market longer term , this is a giant b wave.  The October 1 2019 drop was c of B, we have now finished C of B ....Big B that is.  This will create a drop to the low 2800/2900 .  Catalysts to this will be disappointment with the trade deal....Which is hocus pocus.....difficult to enforce and the Chinese know it.  Trump needs a deal at any cost....So we ll retrace to where the market bounced when the Phase 1 was announced in the first place.  

Large cap stocks like Apple are o/bought and over priced....end of.......Every share portfolio in the US has Apple in it.....Like Ford and GM  30 years ago.  Tin gods that you worship at your peril.  

Why be bearish???? 

USA :  Fed ...painted itself into a corner.....Rates at 1.6% indicate a shrinking economy....despite easy credit...We have worrying signals that the USA is going nowhere fast. Therefore the stock market is over priced. 

It is an election year.  By super Tuesday ....The stock market is going to have to start pricing in a Trump loss.  (even if it does nt go that way) 

Government deficit.  i was in the market in 1987....The US problems were 2 fold....A booming trade deficit and a crippling government deficit.  BOTH are still true.  Who owns US debt.....The Chinese !!! The Us has exported their debt abroad ....Savings rates in the US are weaker than in 1987 other than 401K s, which are predicated on a bouyant stock market. 

If the stock market drops Trump will loose and he knows it. Feel good America wo nt feel so good any more. 

The likelihood is that commodities will drop...Which will further exacerbate the drop in stocks. Copper is used for margin for example.  I doubt Oil will stay up here and copper etc look wobbly.  If the world economy was robust oil and copper etc would be considerably higher. 

I ve been told on this blog that shares are in a permanent bull market......Tripe !   Is all I can say to that.  

[dmedin]

9 hours ago, Mercury said:

One thing I am convinced of is that either way a period of bearishness is indicated.

I like your analysis, but I see the opposite - there's significantly more upside to come.  The 'oversold' indicators are nowhere near the dot.com levels and there's too much at stake for a huge pullback.  It might happen if Bernie Sanders becomes president though

[Mercury]

42 minutes ago, dmedin said:

The 'oversold' indicators are nowhere near the dot.com levels and there's too much at stake for a huge pullback. 

I take it you were not around for the dot.com bubble.  Nice to see that the hype is at the same magnitude as back then even if the oversold indicators aren't (not that that is at all relevant!), takes me back to my nostalgic years and is a nice additional contrarian indicator...

[Mercury]

5 hours ago, cheviot said:

I ve been told on this blog that shares are in a permanent bull market......Tripe !   Is all I can say to that.  

I concur, obvs.  It is a truism of markets that you get maximum hype, blind greed and complacency at the end of a bull run.  We certainly have that in spades now, except for the COT data, which bugs me...  Would like to see your analysis on a chart or too if you have time. 

[dmedin]

42 minutes ago, Mercury said:

Nice to see that the hype is at the same magnitude as back then

Oh really?

[dmedin]

If Bernie Sanders becomes president, the stock market will tank.  But it will be a blessing for all the non-billionaires

[Mercury]

11 hours ago, dmedin said:

If Bernie Sanders becomes president

There is no chance of that.  The man is 78, has had a heart attack recently while campaigning and by American standards is a communist!  Warren is more of a threat although the Dems will be hoping for Biden as he has the best chance against Trump.

 

I don't think it will matter who is President in November...

Edited January 13, 2020 by Mercury
to add a point

[Mercury]

Dax may be leading the way just now with a nice 1-2 move and drop away.  Looking for a lower low here.  FTSE100 buy the dips boys came in, possibly on the mistaken view that the FTSE always moves inversely to GBPUSD (clearly this is not the case), and are now getting whipsawed and the Dow futures are also turning after a small scale 1-5 down and A-B-C back up, which is what I was tracking.  Not confirmed yet, we need a lower low, bu a good sign for those of a Bearish persuasion right now.  Plenty of other indices also showing similar like the Russell and Nikkei if you prefer...

[dmedin]

https://uk.reuters.com/article/us-usa-markets-risks-analysis/stretched-tech-stocks-leave-some-investors-seeking-off-ramp-idUKKBN1ZC14H

 

best to just keep your spare cash under the bed ... pay off the mortgage and blow the rest on wild women and booze

[Mercury]

Here's something interesting concerning the Feds Repo operations, or as some are calling it QE4.  Seems to me like things are getting a bit desperate.  Perhaps the Fed does actually get it!  Perhaps they fully understand that if the stock market craters then confidence will evaporate, a recession will kick in (to the extent it hasn't already...) and jobs will be lost.  Given their mandate maybe they can justify their extraordinary actions as fulfilling that mandate rather than being bullied by Trump?  Who knows? 

https://northmantrader.com/2020/01/14/repo-lightening/

The only conclusions I can draw from all this are that the markets are not going up as a result of any fundamentals, just following the Fed financial engineering and when it end it will be very very bad.  As no one can call the top and the perma bulls have no idea what level the markets should reach, because the fundamentals do not support this market, it would not be wise to stay invested.  There are, thankfully, lots of other markets to work on while this nonsense is resolved.

For now the US large caps have failed to make a higher high on the 1H charts with short term 1H double tops on S&P500 and the Dow.  Other markets remain resolutely below their ATHs.  DJTA remains below its ATH (for you Dow theory types) and Apple is showing some signs of keeling over...  Doesn't mean anything yet, not until we see a drop but progress on stocks is not the stuff of a big rocket to the moon just yet, until it is I remain prepared for a Bearish move.  Even if Stocks do breakout I prefer other markets such as soft commodities for Long trading on the simple principle of buy low sell high!

 

[Mercury]

Russell 2000 has hit an interesting point with US large caps just into fresh ATHs.  Price has hit and rebounded back off the top of a daily narrowing channel just after the Fib 88% off the ATH.  There is NMD on Daily and 1H charts and a credible 1-5 EWT labeling for the rally, that would be a wave C of wave C.  Not conclusive until we see a small 1-5 down, A-B-C retrace and then a fast drop but an initial sequence may be in play on the 1H.  One to watch.

 

[Mercury]

A bear can dream...  That maybe one day (maybe today) the markets will realise that all the QE4 repo operations in the world wont paper over the cracks and the cracks are likely to be structural...

 

[dmedin]

4 minutes ago, Mercury said:

A bear can dream... 

 

In the meantime, why not make money by following the trend?

[Mercury]

1 minute ago, dmedin said:

In the meantime, why not make money by following the trend?

Sure, why not...  My posts are not about NOT being long, they are about keeping an eye on the potential end.  Traders are only bearish or bullish in the moment if they are swing traders, it is the perma-bears and perma-bulls you want to watch out for, their bias has then by the short and curlies...  For sure I am long term bearish but not yet short term as it obviously hasn't turned yet but I prefer to be Long other markets in general rather than having to sweat a big reversal on stocks, that only works for day traders, which I am not.  This way I get a good nights sleep not sweating over an overnight Asia crash and don't have to sit glued to the screens all day...

[Mercury]

Overnight bearishness in Asia is often where the first move comes.  The Nikkei turned without putting in a higher high, you could call it a double top perhaps.  The Dax did likewise, vs its ATH, and may also be tracing out an ending channel (A-E).  If correct then we should see a fairly swift test of lower channel lines and horizontal support.  USDJPY has been sluggish about posting higher highs and turned down with the Nikkei.  USD seems to be stuck at a key resistance point with some short term bearishness, we may see this break out into a rally if stocks plummet, even short term.  Interestingly Gold/Silver has turned bearish short term but there is no need for these markets to rally on stock drops or vice versa, especially is USD rallies hard.  I have a strong scenario for Gold/Silver bear phase (see separate thread).

The bigger picture on the Hang Seng looks bearish long term with a potential Bull ending wave 5 back in early 2018, followed up by a 1-2 (pink) and a second with a lower lower last night (1-2 blue), both turning at key Fib resistance zones and on NMD.  If we see this sustained to a lower low then game on!

Finally Apple seems to have put in a short term double top (not something I would usually credit but maybe "this time it is different?").  I will be interested to see what happens on actual US opening and key will be a break back into the daily channel, which would set up an overshoot (or fakeout).

I am Short off the wave E turn and break lower.  Let's see if we get the customary complacent buy the dip rally back or something else... 

 

[dmedin]

6 hours ago, Mercury said:

buy the dip

Woo hoo 🥳😻🐮

[Mercury]

So the Dax put in a new ATH and one could be forgiven for getting bullish, I did think about it for a nanosecond then saw the Dax promptly drop back below the previous ATH.  Significant?  Could be if that was a double top.  The FTSE remained bearish despite the US large cap and Dax fresh ATHs (except for the Dow, hmm...).  The Hang Seng continued its bearish direction too, as did the Russell 2000.   The Nikkei put in a US large caps led rally but shopped short and reverses with the Dax.  Smells like a breakdown of correlation perhaps.  Late today even the might US large caps took a little tumble, nothing serious yet but landslides do start with a few pebbles...  As always it is not so much the candle action as where it occurs for me.  The FTSE100 failed to make a higher high and so did the Nikkei and the tiny new ATH on the DAX solves a technical issue for me on the last major bearish phase, rendering it a clean A-B-C retrace.  The Nasdaq is perhaps the most interesting just now as it has spiked and rebounded back off a confluence of a daily upper channel line and a very long term resistance trend line.  Not conclusive but compelling enough for a low exposure Short.  In addition all of these markets have significant NMD at recent turns across multiple time frames and EWT lines up for rally ends.  The Dax still has a potential ending channel in play.  It is a truism that market tops happen without any bells tolling, that occurs much later.  Usually the tops come in and turn on no negative news and lots of bullish sentiment, the bull just runs out of steam, and/or there just isn't anymore "good" news to drive it further and confidence wains sufficiently for the buyers to evaporate gently.  Perhaps this such an event, perhaps it is just another correction before the madness begins again.  Either way it is worth a cheeky Short with tight stops.

[Mercury]

Meant to add to the above that Google share price hit $1,500 today and rebounded back off it in a daily pin bar spike that is part of a current long term channel overshoot.  If price falls back inside the channel and continues down this could mark the top for Google and with it the whole tech market.  Again not yet conclusive but stocks are nothing if not sentimental and maybe 1500 is a psychological limit from a valuation POV.  Valuation? Hahahahahahahahahahahahaha.

 

[Mercury]

Tesla is more valuable than VW despite not being profitable.

🤣

Ding ding?

https://www.bbc.co.uk/news/business-51214824

Now that's what I call a melt up!

[Mercury]

This one goes out to all the Bears!

After a turn at the upper channels the Dax has put in a small 1-5 bearish move and is now retracing back up. IF this bullish move turns without a higher high in an A-B-C wave form and drops to make a lower low vs the one just posted then a bearish phase is on.  One to watch in for US open and possibly through to Asia overnight.

[dmedin]

10 minutes ago, Mercury said:

IF this bullish move turns without a higher high in an A-B-C wave form and drops to make a lower low vs the one just posted then a bearish phase is on

Higher highs and lower lows?  Sounds like Dow Theory 😮

 

[Mercury]

2 minutes ago, dmedin said:

Higher highs and lower lows?  Sounds like Dow Theory

And EWT and charting and trend following etc etc.