Market Fragility Returns
I have been harping all year that signs of a major top abound, and the scene continues to unfold. I have no conviction at the moment as to whether we bounce a little here or continue lower. In the big picture, I remain exceedingly confident that we are witnessing a major topping process. In the short term, I could imagine us bouncing here. I am net short, but have covered my VXX positions and bought a little XIV (inverse VIX) as a hedge of sorts. Today, even with the market very red, VIX underperformed significantly. It may be that fear is overblown for the moment.
Here is a long term look at the S&P. For those of you who have been following along on my blog, you’ve been seeing this rising wedge since early 2013. We had a significant violation of support in October. I suspect that softened the ground and we will see another significant breach by the end of January, if not much sooner.
Here is a short term look at the S&P (futures). We see that the support line was violated once again and the 50 day moving average was also violated in the last week.
The Nasdaq has markedly outperformed for years. It has hit has an intermediate support line and pulling back from resistance. If the air starts to come out of this equity bubble, I expect Nasdaq would significantly underperform as traders sell winning positions in tech to cover losses in energy and high yield.
Here is VIX. It is at levels that have often proved to be tops for fear. VIX also put a sizable wick onto the chart today.
One commodity that I have been long (options) for awhile appears to finally be breaking out: wheat. It is approaching the 200 day moving average, which should act as resistance, but it has been beaten down for so long that would seem to have plenty of room to run if it gets some momentum.
Good luck trading in these volatile markets!
Playing the Ponzi 
Did we just get a reversal wick today that contradicts the reversal wick we saw on Monday? (Both in SPY and VIX, though in opposite directions.) I’m not even sure what that means…
Wow. These two days have been breath-taking. I didn’t really look at the charts closely. There is so much volatility that it seems there are wicks all over the place. This week will have a huge bullish wick by the time it is done. I was caught totally off-guard by the rally today. I bought some UPRO (3x S&P) yesterday late in the day. I hated buying it, and felt bad about it… but today I sure was happy I owned it. I dipped into some April options for USO on a flyer. Every huge upward rip like this makes that much more convinced that this is going to end very, very badly. It is trying to suck everyone into this black hole before it crashes. If this week winds up being another giant wick… does that mean we rip to new highs again? Seems reasonably likely…
Are we back at upper resistance for the S&P in the big rising wedge? It kind of looks like it. (That was fast!)
The short version is “yes”, I agree we are about there. I have different lines at different places, and since we are talking about a 3-5 year pattern, a slightly different trajectory can make for noticeable differences. On my futures chart, we are at resistance, on my SPY chart there is a little more room to rise… but that strikes me as a pretty arbitrary difference. And yeah, wow, that was incredibly fast. Reeks of panic-buying. I didn’t cover any of my shorts and may look to add more here… especially after the New Year.
Seems like we’re seeing a clear topping process now. I’m wondering if this is a head and shoulders setup on the weekly S&P chart, with the October low on the neckline, or whether there’s some other read of what might come next.
Looks like the S&P bounced off the 100 day, and we have a sharp rally again. (Was it also rising wedge support?) It’s a puzzling market, to be sure.
The sell-off in early January didn’t surprise me, but this sharp rally sure has. As you pointed out, the 100 day has been very meaningful. It’ll be interesting to see if this rally can push to new highs. I remain skeptical, though not utterly so. I am going to get short bonds and think some commodities may be setting up to rally… if bonds and commodities rally, it would seem like stocks would likely rally too. We shall see. Whatever happens in the shorter term (meaning coming months and maybe years), it seems Central Banks continue to throw chips onto the table. The size of the BOJ QE, and now the rumored size of another ECB QE is just mind-numbing. I don’t disagree with the (ex) bears like Grantham who say we have a fair bit higher to go. They could be right on. We shall see… I am trying to keep my opinions very loosely held for awhile here.
Agreed.
Do you see any patterns still intact or levels that are important? It seems the large S&P wedge is basically done at this point, and several other broader index wedges (Wilshire, etc.) are also broken. Same goes for a longer term high yield wedge (I think). Unless these breakdowns were a fake out, we’re sort of in uncharted territory.
Also, given that bonds are due for a reversal, I wonder if it’s possible for the traditional inverse relationship between bonds and stocks to switch to a coupling, as happened in 2007/2008, if I remember right, where they went down and up together for some time.
Bounced off the 100 day again today…
Draft, I see things much as you do. The major patterns in major indexes appear to have played out without any explosive conclusion. Yet. It is interesting that you mention the recent bond market strength and the 09 correlation between stocks and bonds. That was a really funny scenario, where Treasuries spiked in 08 while stocks plummeted, and then almost exactly as the new year started, bonds started dropping… so through the first months of 09, stocks and bonds were plummeting in tandem. In answer to your question, yes, I can imagine that happening again. All it would take it money to be leaving the U.S. Dollar in a blanket fashion. If foreign investors wanted out of everything USD, then both would fall. I don’t necessarily see it happening anytime soon, but I could certainly imagine it.
As you pointed out, it feels like bonds are due for a fall. I have shorted Treasuries just on principle here. For the same reasons, I have bought some oil futures and shorted biotech. None are really “technical” setups, but each seems to priced at an extreme. Hopefully one or two of those plays works out.
What plays are most interesting to you at this point?