Happy valentine's day weekend.
The market is looking pretty frothy after the last dip and run we had. The overall volatility in the indexes is increasing, and starting to open up the price channels we have been reliably trading since Thanksgiving. Opening channels means "widening wedges", which mean big moves will happen - like big'ns. Gut turning, toe curling, make you puke kinda movements. This makes sense as there are two very strong forces in the markets right now: on one side you have the feds continued support and the promise of an unnecessarily large covid relief bill (Cathie's words and I agree: https://www.youtube.com/watch?v=uwajUw4RFVk&t=180s) and future infrastructure spending, and on the other side you have one of most expensive markets in history only rivaled by the late 1920s and dot com eras. People are going to start getting scared and people are going to start over reacting. Remember that anyone actively trading today has only seen this once before at a maximum - the dot com bubble. And yes, this time it is different, the gov is getting ready to ignite the economy with close to 5T of spending over the next two years. And no, it doesn't make holding any easier.
Lets take a look at whats happening so we can plan our next moves. I have added bollinger bands in orange, a 10sma in black, and a 50sma in red to all the charts. When overall chart patterns and trend lines become challenged, as I will show you, these indicators can help you gauge whats happening. The chart below is the Nasdaq 1 day candle chart. You can see the previous price channel in purple that we have been reliably bouncing between since Thanksgiving. Notice the last run broke the top of this channel, and the resulting dip broke the bottom of the channel, and the run we are currently in has broken the upper channel yet again.
The increasing volatility arguably makes this channel irrelevant given that it has broken three times, though the trend remains intact. The more correct pattern to fit is a wedge, as seen in black in the lines below.
Do notice in both charts above that we are riding the upper bollinger band, which is extremely bullish price action, and is usually not sustainable for long. Periods of extreme runs like this usually result in prolonged consolidation patterns like we saw in September through November. While that may sound bearish in the long run, the truth is these events can also lead to pretty spectacular breakouts, and this is what I want to turn our focus to: are we going up or down?
Looking at the first chart, we appear to be testing the upper purple resistance line of the channel, and it looks like this could be forming support. However, if you look at the second chart with the wedge, we appear to be bouncing off the upper boundary of the wedge and getting ready to reverse. When you have conflicting TA like this, adjust the window to see what the market is doing now. If we take a look at the 15min candles below instead of the 1 day chart, we can what the market has been thinking for the last few days. The original purple channel still shown, but look at the ascending triangle formed by the green lines. The last 15min period of trading today broke the ascending triangle, which indicates a breakout - meaning we are going up. But I dont see an catalysts on the horizon to drive this...
This doesn't mean our down side risk is negated. Based on 15 min candles, you can have a serious rally and then huge dump all in the same day, or couple days, particularly if there is no big news to drive a move. The way I am interpreting this is we are likely getting ready to form a grave stone doji in the next couple days, which is when the market opens, rises fast, and the falls back to the opening price, indicating there are no buyers at these prices. Or in other words, we get a breakout on the 15min candles that collapses kinda fast, and forms a doji on the 1 day candles.
By the way, it is very odd to see indexes behaving like this. For indexes, we usually get these nice and slow forming channels that go up on good earnings, down on bad earnings, but somewhat related to gdp and corporate profit growth. We usually get sudden moves down based on global negative news, followed by sudden moves back up once everyone realizes they overreacted; however we it is rare we see such an emotional and speculative market that actual patterns like ascending triangles apply to an index. The psychology is driven by speculation, and to have market-wide speculation on this scale that these patterns show up in the index is beyond wild. Clearly people are thinking the US is ready for some extreme growth.
Anyway, I do not think the fundamentals cannot be overlooked at this point. There comes a point in every bubble when people do the math on company growth and it literally isn't possible for a company to meet it's speculated valuation and it all comes tumbling back down. In our case though, the speculation is warranted due to huge spending bills on the horizon, which is why I think the volatility will continue this winter. So even once we dump, I think we only hit the middle bollinger band or 50sma and then keep on going up. We won't see a huge dip or "pop" if you will unless the spending bills get substantially smaller and significantly delayed... which I do think will happen.
Along this note, Cathie Wood also made a prediction about how much the market would grow this year and she said 20%, but with a lot of turbulence. Lets say we believe that is true - then from Jan 1st 2021 to Jan 1st 2022, the indexes should be about 20% higher this year. If you looked at our progress thus far in the chart below you will notice the RUT is already up 15.9%, the Nasdaq is up 9.4%, the sp500 is up 4.9%, and the DJI is up 2.8%. Here we are six weeks into trading for 2021 and we are almost half way to Cathie's growth target of 20%. If the current trend continues, based on rough calculations the Rut will close the year up 135%, the nasdaq would be up 81%, the sp500 would be up 41%, and the dow would be up 24% - literally every way you could define the market it would massively surpassed all expectations.
4hr candles comparing the relative returns of all indexes.
Fun observation in the chart below, the insane compounding of the dot com bubble did do exactly this. From March 1999 to March 2000 the Nasdaq returned over 110%. Not that is going to happen again. In fact because this has already happened, it almost certainly means it will never happen again. I expect a lot more turbulence and profit taking instead of a literally market-wide 110% rally. So like Cathie said, we will likely have a block buster 20% year, which is monstrous. But based on what we have done so far this year, the turbulence should be poop-your-pants epic.
1 wk candles shows the relative index returns through the dot com bubble.
Lets take a peak at the other indexes. The sp500 is still following the trend of it's prior price channel shown in purple in the chart below - aka unsustainable high growth.
But what is interesting about the sp500 over the last few days is it has also formed an ascending triangle and initiated a breakout at the end of the day as well.
Again, just like the Nasdaq, the sp500's price action is forming an opening wedge, evidence of the expected turbulence to come.
The Rut only just now starting to form the wedge pattern, based on the last two dips, and is staying nicely in a steep channel we have seen since November.
However, looking at the Rut's 15min candles, we see a downward channel forming over the last three days. Just like the other indexes, the end of the day price action for the Rut did break the top of the channel indicating we might see a breakout to the upside in the near term.
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One of the things that can help us get a stronger sense of where the market is going is the degree to which people seek "safe havens" or hedge against potential market dips. I have noted in prior TA posts that we can watch these indicators rise in the days leading up to a dip, which indicates a change in psychology. Lets start with the VIX, in the chart below. You can see the VIX has continued to cool off since our last dip on Jan 27th, falling to local lows at the end of the day today. Clearly no one is hedging right now, or expecting significant volatility. While that does act in contrast to my thesis, know that the VIX does not and has never seen as far into the future as it claims to be able to see - its for a couple days at best. The current VIX means investors are expecting the uptrend to continue for the next couple days, which is consistent with my thesis. However, if we breakout and go too high too fast, expect the VIX to start rising in anticipation of a drop.
People will often flock to TLT during times of market down turns as well, and similar to the VIX this often starts to rise in anticipation of a dump. As you can see in the chart below TLT gaped down, meaning we should not expect a dump now. And note the dollar index has held stable over 90 for the last month too. Also note how large gaps down in tlt are followed by a few days of consolidation and a brief uptrend, during which time the market does dump, which is evident we are likely getting ready to form a peak soon.
We can also look at gold, and see again the price decreased today. Though I don't think this makes sense to buy until some of the fed spending packages are passed anyway. This is more of an inflation play than anything else.
Bitcoin is being touted as the new gold, bla bla bla, so I'll show it here for completeness only. BTC is rallying based on TSLA buying 1.5B of it as well as visa saying it will include BTC as payments. BTC is not a "hedge" buy rather a hype play as crypto gets more and main stream. You can play this with leverage via options with MARA and RIOT. Wait for BTC to touch the 50sma and get loaded up on calls.
Something I haven't explicitly shown before, but have discussed is the put/call ratio, seen in the two charts below. The first is a 5 year window that gives you some historical reference, and the second is the last three months. Notice the sinusoidal pattern that happens with this ratio over time - the more the market goes up the more puts are bought and vice versa. Our large market dips have been pretty cyclical the last five years, hence the pattern. Also notice we appear to be cresting a peak on the 5 year chart, which does suggest we might be in for a nice dump at some point this year - doesn't mean it will happen this week (I dont think the really big dump will happen until this Spring, I speculate we will see quite a few issues passing some of these spending measures). Now take a look at the three month chart - notice quite a few of the spikes in put buying correspond to market peaks prior to a dump. Also notice more dumps are predicted than actually happen - so grain of salt. Today put buying started to increase a wee bit indicating people are starting to prepare for a possible dip.
Lets now turn our attention to the GEX and the DIX from the dark pools. We have noted that the spikes in the GEX do seem to precede dips, and we got a spike in the GEX today that looks like it might keep going for another day or two. This indicator has been pretty sensitive for us in terms of calling these little 3-5% dips, and depending on where this things peaks at, that is exactly what we might see setting up over the next few trading days (ie peak formation and dip).
https://squeezemetrics.com/monitor/dix?
As a final indicator that I think is pretty helpful in terms of understanding some nuances about the market is the CNBC fear and greed meter. It's reading greed today, and quite a bit more greedy than yesterday. However, if you look at the second chart, one of the metrics is safe havens which CNBC defines as bond performance vs stocks. I was surprised to see bonds gaining performance on stocks, not that they are better, just closing the gap. I think it is indicative of investors beginning to prepare for more volatility in stocks. In the third chart, the overall trend with the fear and greed meter is pretty darn bullish, but again, we don't seem to be able to keep this up for more than five quarters before getting a sizable dip.
https://money.cnn.com/data/fear-and-greed/
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Final thoughts for you
- We are way over extended in terms of our current price trajectory. This is not sustainable, even by a very bullish investor's views (Cathie Woods).
- Expect a lot of volatility this year. A big dip is incoming, and if I had to guess I'd say late spring or early summer, and it will likely be due to delayed spending bill(s). As Cathie noted in her video (way back at the top of this post), the economy is very strong right now and congress doesn't need to do much of anything. I think delaying the covid spending bill to March, which is what Nancy is doing, will create huge problems and ruin any chances of meaningful legislation being passed this spring. If we get another drop in unemployment as we did this last month, congress will not be able to maintain the narrative of needing more covid support, or needing to pass as large of an infrastructure spending bill as they are currently eyeing. This means the speculative forces driving the market up will take a hit, thus giving way to the "over valued" forces that want to bring the market down.
- In the short term, our price channels are degrading and giving way to widening wedges, which means more volatility, per the above explination. While this all seems bearish, what we have on our plate at the moment is quite bullish. We have ascending triangle breakouts forming on the nasdaq and the sp500, as well as low demand for safe haven investments. This means we could see some nice spikes over the next day or so of trading.
- Back to the bearish top calling, we are seeing increases in the put/call ratio and GEX starting, meaning there is some degree of hedging taking place. Which is further evidence of a dip in coming.
- I do not think the next dip is the "big one". I think this will be another 3-5% dip that we often get. As I explicitly explained in the TA, we are expecting a return to the middle bollinger band or the 50sma and not a 10-20% dump back to the 200sma.
I'm going to start taking profits after this last run up, and start getting a dip list put together. I have been working on calling peaks with the intention of buying vix calls and index puts as a hedge. Once a more clear peak shows it's self, I'll likely enter a few hedge positions as planned.
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