Sunday, November 6, 2016

Short term trading within IT and LT perspective

During the last three months, if you read this blog, you would know that we had a bearish intermediate term perspective for US equities. From internals to price patterns, everything we looked suggested lower prices for stocks.

The following SPX chart was posted for our members on October 26 , it simply showed our projection for SPX:

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This is how it looked at the close of Friday Nov 4 2016:



 As a general xTrends rule, the first test of a projected channel support almost always produces a significant bounce , especially if the subject is a benchmark index.

So we closed our shorts a while ago and were heavily long index futures going into Monday with an expectation for a large gap up 


Our decision was not purely on this price pattern, but based on sentiment, seasonality and certain signals derived from volatility related instruments. This bounce may last for weeks but it is going to be nothing like those we saw during the quantitative easing period. It is going to be corrective, choppy and hard to trade. I will explain why

Purpose of this post is put the current action into the perspective that we have been outlining here for sometime now. As you know we think the bull market ended in late 2014 and we have been in a range bound market since then. We see this range action as a topping process that will be leading to the next bear market. We think the topping process is also ending and we are very close to the beginning of the first leg of the impending bear market.

Today , I will show you a few long term cyclical charts derived from important economical data. Unlike our previous updates which were mostly technical and analytical research on price, internals and sentiment, these charts are purely based on fundamental data:

Difference between "Continued Unemployment Claims" and "Initial Unemployment Claims" already signaled a turn

 Ratio of "Personal Consumption Expenditures" to "Core CPI (Consumer Price Index)" also signaled a turn 

Industrial Production Index made a clear turn too

 Inverse Unemployment Rate is about to make a negative crossover too.

  As you can see, some of the economic data also show signs similar to those we obtained from the analysis of price and internals.

So I would like to reiterate that, despite the FED and zero rates, it is likely that we are entering in a bear market and the market went down for 3 months not because of uncertainties related to the election but because of the fact that underlying conditions were mildly bearish especially for a market that partially made all time highs on the back of very small group of stocks. We could see this reality from the ratio of SPX Equally Weighted Index to SPX which we had shown a while ago.

So I for one wouldn't  hold my breath for new all time highs this time and the evidence suggests that whatever rally we get here will likely be corrective and terminate at a pivot lower than 2016 high. We will not be holding the long positions for a long time, we will likely sell at the first weekly resistance SPX tests.