Short Term Bottom Looking More Like Long Term Top

A mea culpa may be in order.  I may have been too hasty or at least too enthusiastic in my belief that a rally was at hand.  Years of BTFD conditioning will do that, I suppose.  Last week’s beautiful reversal hammer has not seen the necessary follow-through thus far this week.  [I have updated these charts to reflect Friday’s action] Given this week’s action, the S&P has broken its long term support trendline.  As was the case last week, watching follow-through action will be critical.  This week has seen the kind of manic activity common to bear markets.  But with the late week selloff, the major longer term supporting trendline was cleanly broken.  The S&P is still sitting around the 200 day moving average, and should have some support, but I will be viewing a bounce back above 1950 from here as a selling/shorting opportunity.

The break looks cleaner on the long-term weekly chart.  I have spotlighted the severe intraweek break that occurred in 2011.  But the market ralled by week’s end, creating a large bullish wick that proved to portend the gains that followed.  The bullish wick from last week has not been followed by supporting action though, and this week’s breakdown may portend significant downside.

Support for the idea of a significant breakdown can be found in the price action of commodities and other equity markets around the world.  Vanguard’s All-World equity index (VEU) has very clearly topped and remains in full retreat (this chart is actually a bit old and VEU is at 47 as I write).

2014-10-07-VEU_CHARTS

Crude oil may now be breaking support as well.  The IMF has cut the global growth forecast.  These news bits just add to a picture of expectations that have been steadily raised over the last five years with both bulls and bears growing increasingly bullish.  If they are indeed disappointed, the fall could be pretty swift.  If the fall is swift, selling could be dramatically exacerbated by the collective leverage in play.  The current negative credit balance exceeds that of both the 2000 and 2007 stock market bubbles.

So, it looks like the first top I called was the right one, and the reversal pattern last week may have been a head fake.  If this breakdown holds, a significant pullback could finally be at hand.

**UPDATE: S&P closed Friday down 20 or so.  That breakdown is in play for the weekly chart.  I see this is very bearish for the mid/long term.  The next breakdown to watch for is the “death cross” of the 50 day MA crossing under the 200 day.  That would be few weeks off, and the S&P may bounce around her for a little while first.  It is sitting near the 200 day moving average, so I might expect a bounce early next week, but would imagine it as a selling/shorting opportunity, rather than a bullish bounce.  I would probably need to see an engulfing candle or something like that for me to view this week’s action as bullish in any way for the longer term.

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  1. Draft
    October 15, 2014 at 8:52 pm

    Did we see a short term reversal today? I hesitantly went for it, but I’m not sure it was the right move.

    • October 15, 2014 at 9:34 pm

      I feel (and acted) exactly the same as you, Draft. We are in the same boat. I covered some shorts today and dipped a toe in on the bullish side by shorting some VIX. Wild intraday action, and the possibility of a big reversal wick. But there has been such volatility I’m not sure that I have much trust in this reversal setup. All of that is to say my feeling is like yours – it feels like we should rally a bit here. And probably rally hard, if the market can just find an excuse.
      That said, I think the safer and more sensible bet is to just wait out the rally and reset bigger shorts at resistance. I am being silly and greedy by trying to get profit out of a reversal here – basically grabbing at a falling knife and hoping. That’s just the unwise gambler in me showing up to get some action, really. I think the sensible play is to wait for the rally then reset shorts near 1950 or so. All of that is really just speculative guessing my part. I don’t have a strong opinion on the chart here… except to say that, in the bigger picture, the “top is in”, imho. I think we are in for a multi-month bear market, and maybe worse. Maybe much worse.

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