Calling a bluff - Broader market update
So yesterday the market was blown away by the fact that the Fed was going to do what it says it was going to do.
And, in the market's defense Jpow did go up to the podium and essentially lie through his teeth in an attempt to assuage markets into thinking that inflation will be "transitory" and that they're still on track for their first hike in 2023, even though we had more Fed governors plot their dot at the end of 2022 than we did in the last Fed meeting.
The bond market called bullshit, and with it the rest of the financial world. With /ES and /NQ printing a H&S overnight that started to break down and finally broke the neckline as Europe came online. This retraced /NQ back down into where it started pre Fed statement, and /ES just short of it.
They called his bluff.
Now, to put this into context and to convey why I think this is a lot more serious than people may lead on are a lot of different factors. We'll start with SPX.
SPX has been seeing sell pressure spurred by the correction in big tech and growth including TSLA. But it was able to make a marginal new high, and try and break out over the past several days. But this is all in the face of shorter extensions, and deeper pullbacks. With our last pullback just barely making a higher low we were able to get a 100% trend based fib extension. Pair that with a series of higher lows in RSI it looks as if we're looking for a trend termination. We may be literally topped out.
Moving into the RUT, or the Russel 2000 we're running into much of the same story. With /RTY failing to make a new high from the downdraft we had earlier this week, and further making a lower high today RUT is looking much like SPX, but much more in need of a trend termination/correction. IWM/RUT/RTY has been on a fucking tear since particularly the election, and furthermore a couple days later on the first bout of vaccine efficacy news. RUT has seen over a 55% move since it started this larger leg in late October. And since then it was started to flatten out. We've been seeing, over time, pullbacks get deeper, and extensions get shorter. IWM/RUT/RTY is also starting to print a series of lower highs on RSI, as well as a downtrend in Accumulation/Distribution. We're looking for a trend termination in small caps as well.
And then there's NDX. NDX was by far the market leader post COVID up until about a month ago. In a 0 yield environment the growth and mega cap tech stocks housed within NDX were by far the largest beneficiaries of the post COVID world. That was up until about a month ago.
Without getting too far into the weeds the move higher in yields, and lower in bond prices started really back in November with the election of the Biden administration, and has since accelerated really gaining steam and dropping out of its channel Feb 22nd. This precipitous drop in price, and gain in yields based on inflation expectations and a US economy that is starting to gain steam. In a low bond yield environment, one where you actually lose money on bonds, funnels money into equities. The money has to be invested into something. And dividend paying stocks averaging about 2.5% and also high growth and large cap tech stocks filled that void. Now that yields are starting to go higher that is degrading and eroding the TINA (there is no alternative) narrative because now, there is an alternative.
So, in short we've inflated a bubble in large cap tech, and growth stocks and as yields slowly rise; or in this case rise too quickly for the market's tastes we're now delfating that bubble. I'm not going to say we're popping it, because this has been relatively controlled for now.
But now that we've gotten the background out of the way we topped in NDX with a H&S pattern back on 02/16, and after putting in a temporary bottom 03/08 we had a relatively aggressive retrace coming off of the breakout area from late November. But, since then we have struggled to retake the 20 period, and 50 period SMA's on the daily as well as the breakdown candle highs of around 13300. Now, the bluff that Jpow fed to us yesterday finally got us back above the 50 period SMA, but not the breakdown candle high. Overnight, the market completely rejected this completely retracing the 2% move back to positive we saw yesterday for one of the most epic fakeouts I've seen in a while and culminating with a complete rout today giving up the 50, and 20 SMA as well as the important level of 12900 and a 3% move lower for a massive bearish engulfing/reversal. The measured move back down into the daily 200 period SMA and possibly even further giving us over a 15% correction when all is said and done. That would be another 5 or so percent past the previous lows.
That brings us to DJI.
DJI has by far been the benefactor of the rise in yields and the more positive outlook for the economy, and inflation. With more economically sensitive stocks like banks, oil, materials, and industrials essentially putting the market on their back both in DJI and SPX. And with that DJI has essentially had a massive extension from its strange pattern it printed during NDX's initial leg down. But, we're to the point right now where that rubber band is as stretched as it can be, and may be put in a topping candle today. By all measures this leg in DJI is overextended. At its highs today we were over 1300 points extended from the daily 20 period SMA. That is asking for a pullback. And on top of this we took out a very important pillar of support holding a portion of the market where it is: oil. Oil, specifically /CL saw over a 10% move lower today leaving the job to financials, materials, and industrials. BA already blew off top earlier this week, and DOW can only do so much by itself so that leaves financials. Which JPM was up over 4% at one point today, GS up over 2%. XLF up over 2.5% and KBE and KRE banking indexes up over 4% and 3.5% respectively. They can only do so much.
What's my point in all of this? Buckle up. Because the correction that started in NDX a month ago is about to start including the broader market like small caps, oil stocks, and the indexes in a broader sense. We're out of headroom in the sectors that were buoying the broader markets and with the massive reversal in NDX today we may be in for much lower prices.
Now, this is all with a grain of salt. Esecially with quad witching tomorrow, in which i have literally 0 idea how it will play out. The moves down in SPX and RUT today may just be standard pullbacks and we're extending to new highs by tomorrow or Friday. But just wanted to lay out my view and understanding of the market as of today's close.
*This is not trading advice. This is my own personal opinion based on my own personal TA. You are responsible for your own trades*
And, in the market's defense Jpow did go up to the podium and essentially lie through his teeth in an attempt to assuage markets into thinking that inflation will be "transitory" and that they're still on track for their first hike in 2023, even though we had more Fed governors plot their dot at the end of 2022 than we did in the last Fed meeting.
The bond market called bullshit, and with it the rest of the financial world. With /ES and /NQ printing a H&S overnight that started to break down and finally broke the neckline as Europe came online. This retraced /NQ back down into where it started pre Fed statement, and /ES just short of it.
They called his bluff.
Now, to put this into context and to convey why I think this is a lot more serious than people may lead on are a lot of different factors. We'll start with SPX.
SPX has been seeing sell pressure spurred by the correction in big tech and growth including TSLA. But it was able to make a marginal new high, and try and break out over the past several days. But this is all in the face of shorter extensions, and deeper pullbacks. With our last pullback just barely making a higher low we were able to get a 100% trend based fib extension. Pair that with a series of higher lows in RSI it looks as if we're looking for a trend termination. We may be literally topped out.
Moving into the RUT, or the Russel 2000 we're running into much of the same story. With /RTY failing to make a new high from the downdraft we had earlier this week, and further making a lower high today RUT is looking much like SPX, but much more in need of a trend termination/correction. IWM/RUT/RTY has been on a fucking tear since particularly the election, and furthermore a couple days later on the first bout of vaccine efficacy news. RUT has seen over a 55% move since it started this larger leg in late October. And since then it was started to flatten out. We've been seeing, over time, pullbacks get deeper, and extensions get shorter. IWM/RUT/RTY is also starting to print a series of lower highs on RSI, as well as a downtrend in Accumulation/Distribution. We're looking for a trend termination in small caps as well.
And then there's NDX. NDX was by far the market leader post COVID up until about a month ago. In a 0 yield environment the growth and mega cap tech stocks housed within NDX were by far the largest beneficiaries of the post COVID world. That was up until about a month ago.
Without getting too far into the weeds the move higher in yields, and lower in bond prices started really back in November with the election of the Biden administration, and has since accelerated really gaining steam and dropping out of its channel Feb 22nd. This precipitous drop in price, and gain in yields based on inflation expectations and a US economy that is starting to gain steam. In a low bond yield environment, one where you actually lose money on bonds, funnels money into equities. The money has to be invested into something. And dividend paying stocks averaging about 2.5% and also high growth and large cap tech stocks filled that void. Now that yields are starting to go higher that is degrading and eroding the TINA (there is no alternative) narrative because now, there is an alternative.
So, in short we've inflated a bubble in large cap tech, and growth stocks and as yields slowly rise; or in this case rise too quickly for the market's tastes we're now delfating that bubble. I'm not going to say we're popping it, because this has been relatively controlled for now.
But now that we've gotten the background out of the way we topped in NDX with a H&S pattern back on 02/16, and after putting in a temporary bottom 03/08 we had a relatively aggressive retrace coming off of the breakout area from late November. But, since then we have struggled to retake the 20 period, and 50 period SMA's on the daily as well as the breakdown candle highs of around 13300. Now, the bluff that Jpow fed to us yesterday finally got us back above the 50 period SMA, but not the breakdown candle high. Overnight, the market completely rejected this completely retracing the 2% move back to positive we saw yesterday for one of the most epic fakeouts I've seen in a while and culminating with a complete rout today giving up the 50, and 20 SMA as well as the important level of 12900 and a 3% move lower for a massive bearish engulfing/reversal. The measured move back down into the daily 200 period SMA and possibly even further giving us over a 15% correction when all is said and done. That would be another 5 or so percent past the previous lows.
That brings us to DJI.
DJI has by far been the benefactor of the rise in yields and the more positive outlook for the economy, and inflation. With more economically sensitive stocks like banks, oil, materials, and industrials essentially putting the market on their back both in DJI and SPX. And with that DJI has essentially had a massive extension from its strange pattern it printed during NDX's initial leg down. But, we're to the point right now where that rubber band is as stretched as it can be, and may be put in a topping candle today. By all measures this leg in DJI is overextended. At its highs today we were over 1300 points extended from the daily 20 period SMA. That is asking for a pullback. And on top of this we took out a very important pillar of support holding a portion of the market where it is: oil. Oil, specifically /CL saw over a 10% move lower today leaving the job to financials, materials, and industrials. BA already blew off top earlier this week, and DOW can only do so much by itself so that leaves financials. Which JPM was up over 4% at one point today, GS up over 2%. XLF up over 2.5% and KBE and KRE banking indexes up over 4% and 3.5% respectively. They can only do so much.
What's my point in all of this? Buckle up. Because the correction that started in NDX a month ago is about to start including the broader market like small caps, oil stocks, and the indexes in a broader sense. We're out of headroom in the sectors that were buoying the broader markets and with the massive reversal in NDX today we may be in for much lower prices.
Now, this is all with a grain of salt. Esecially with quad witching tomorrow, in which i have literally 0 idea how it will play out. The moves down in SPX and RUT today may just be standard pullbacks and we're extending to new highs by tomorrow or Friday. But just wanted to lay out my view and understanding of the market as of today's close.
*This is not trading advice. This is my own personal opinion based on my own personal TA. You are responsible for your own trades*
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