Is This the Pin That Bursts the Global Bubble?

“Try to see it my way
Only time will tell if I am right or I am wrong
While you see it your way.
There’s a chance that we may fall apart before too long.”
-The Beatles, We Can Work It Out

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.'”
-Haruhiko Kuroda, Governor Bank of Japan

“… the entire market had come back quite strong. The news simply meant that the bull cliques were still fighting desperately against conditions — against common sense and against common honesty, for they knew what was coming and were resorting to such schemes to put up the market in order to unload stocks before the storm struck them.”
-Jesse Livermore, October 1907

In the February 13 morning report, I wrote the following:

“In years to come, the scorching rally that started after the Coronavirus Plunge on Friday, January 21 will be called the Coronavirus BTD. Is the market really as smart as it looks? Is the last two weeks’ rally discounting that the works of the epidemic is behind us? Or, is it possible that insiders and smart money were caught blindsided in late January and the rally was orchestrated as an exit?”

Accordingly, in keeping with the idea that the 1st mouse got the squeeze (after jumping on the first sell signal in late January) and the 2nd mouse may get the cheese for the bears, subscribers bought VXX March 15 calls on Friday

Additionally, mom & pop have been in a buying mania in league with a rally that’s long in the tooth.

A Bloomberg story last week noted that daily average revenue trades (DARTS) at discount brokerages such as TD Ameritrade and E-Trade have almost doubled to an all-time high since last September.

Frenzy has erupted across the board, propelled by big cap heavy weight MAGA’s…MSFT, AAPL, GOOG and AMZN, with speculative stalwart TSLA going parabolic.

Recent new issues SDGR and SPCE exemplify the buying binge.

SDGR, which we recommended to subscribers at 28, doubled in a week.

SPCE quadrupled this month.

These kinds of moves are axiomatic of the kind of optimism in the later stages of long bull markets.

Optimism dies hard. Even fear about what the coronavirus could do to growth and the supply chain has not derailed stocks… yet.

Despite a brief setback at the end of January, the SPX went on to strike new all-time highs last week.

That said, new fears sent the markets reeling on Friday and we advised subscribers to purchase VXX calls.

In Thursday morning’s report, we showed a daily SPX below, suggesting the current pattern mirrored the January top.

I stated, “If a similar pattern is at hand, then Wednesday’s new high would represent a failed rally attempt and we would get an immediate turn down.”

We went on to say that initial support was SPX 3336.

By Friday the index had declined to 3328, with a close at 3337.

In addition to the explosion in retail trading volume, small trader option call buying leaped to 46% in mid-February.

This is the highest level since registering a high of 47% the week of October 12, 2007.

That week marked the top of the bull market prior to a 56.4% drop.

What is interesting is that October 2007 marked a brief secondary new high, which was a test failure following a sharp drop from a primary top in July.

My point is that the SPX may have traced out a fractal of that pattern here in January/February 2020.

In other words, we got a sharp drop from an all time high in late January, followed by a nominal new high in February.

Now the market has pulled back and is sitting on critical support — the prior highs in January.

The market aphorism is that prior resistance should act as new support.

If Friday’s low does not act as support, it will point the way lower — at least for a more significant decline than we’ve seen since the October breakout.

Decisive breakage below January’s low may indicate something more pernicious is on the table.

So the two key inflection points are the January high, 3337, and the January low, 3214.

Secondary support is 3280, which ties to the 50 day moving average.

Notice that the SPX saw a Breakaway Gap below its 20 day m.a. in January that led to a test of its 50 day line.

This morning, the index is once again set to gap below its 20 day m.a. and may take the direct route rather than the scenic route to its 50 day moving average this time.

The 3280 region ties to the 50 day moving average and just below that, around 3250, is the bottom of a trend channel.

Breakage below 3250 and the trend channel points the way to another 100 points lower to 3152, which represents a 50% retrace of the entire October-February advance.

An SPX daily from the February 12 report shows why a reversal from a secondary top warrants caution.

The chart depicts a bearish Rising Wedge within the context of a Measured Move.

How will we know if the line of least resistance is pointing lower… prior to succumbing to a test of the January lows?

The answer is the behavior of the 3 Day Chart.

The 3 Day Chart turns down with 3 consecutive lower daily lows.

Currently the SPX has 2 consecutive lower daily lows (these are intraday lows, not closing lows), but at today’s open will score 3 consecutive daily lower lows, turning the 3 Day Chart down for the first time since January 27.

When the line of least resistance is up and the 3 Day Chart turns down and it defines a low soon in terms of both time and price, it is a bullish sign.

If not, it points the way lower.

Conclusion. The market is testing the upper window of our support window from 3280 to 3333.

This is one of those times the market’s path is going to be rather easy to determine.

As long as our support region holds (3280), it sets up another leg higher through March.

Alternatively, if the SPX is not able to hold 3280 support going into the first week of March, then the potential increases for a decline toward 3200 to 3150.

The time frame going into March is going to be extremely important for several reasons.

First, March has been an important anniversary of turning points this century.

It was the top in the year 2000.

It was the liftoff in 2003.

It was the pivot low in 2008, which, when violated, started the Great Financial Crash that year.

And, of course, it was the bear market low in 2009.

Master trader W.D. Gann taught to “watch anniversary dates with past market tops and bottoms for a change in trend.”

At the top of the 20 year cycle from 2000, the Securities and Exchange Commission ordered all stock markets to convert to decimalization by April 2001.

Theoretically, this was to benefit the small investor.

In truth, it was to enable High Frequency Trading.

At the top of this cycle, we have the aforesaid retail manic buying binge enabled with no-commission, free trades.

Again, all to benefit the small investor, right?

The market has capitalized on every bullish potential since October.

Consequently, a change in character on breakage below the prior January swing high (3337) and the 50 day moving average in the 3280 region into March, puts defense on the field.

The 50 day line has only been seen once since the October breakout. That was the successful test on January 31.

We could see an undercut of the January 31 low, but sustained breakage below the 50 day points the way lower.

Strategy. Since I wrote the above on Sunday afternoon, traders have finally hit the panic button.

The complacency of recent weeks frayed on Friday and has melted away on Sunday night.

While it’s difficult to estimate how much selling will be required to discount ‘some’ worst case possibilities, we will rely on the same technical factors we use to determine the trend and the path of least resistance with a caveat:

This Black Swan may be immune to being goosed by the Fed.

This may prove to be one of those times when it pays to fight the Fed.

In fact, when the Fed unleashes stimulus to counteract the potential for deepening economic global paralysis, if they open the kimono and the market doesn’t respond in kind as it has in the past, real panic will set in.

Monday Morning Update. Since the SPX is gaping below the important 3280 level, 3150 to 3165 is projected.

Central Banks stand ready to add liquidity to counter the virus… of course, because there you have to feed the gorilla.

Trouble is, this looks like the point of recognition where the wheat of what was a liquidity issue gets separated from the chaff of what is an economic issue in a psychological field.

When that happens, where is fair value for equity markets?

Good luck stopping them from getting there, and better luck in spotting it when they get there as the price discovery mechanism we call the market has been tossed overboard.

Pos VXX calls