Wednesday update

SHORT TERM: rally continues, DOW +92

For the first three days of the week the Asian markets have gained 2.9%, and the European markets have gained 1.2%. The SPX started the week at 2532 and hit 2595 today for a 2.5% gain so far this week. When reviewing the charts of the SPX, DOW, NAZ and NDX we do not see them as choppy as we would have expected for a B wave rally. The SPX, DOW, and NDX look like three waves up, and the NAZ is one wave up thus far. Could be corrective, could be impulsive, too early to tell. With that in mind we did a bit of research.

Whenever the Presidents Working Group (PWG) gets involved in the markets through their Primary Dealers. The market generally rallies 10% to 13% before turning over and heading back down again. One time, 1990, it never did fully return to the recent lows. Was that the outlier? Or is that a possibility this time around too? The three levels to watch going forward actually fit with three OEW pivots. These are highlighted in green on the daily chart. SPX 2575, 2632 and 2656. The first is a 10% rally, which has already been achieved. The second a 12% rally, and the third a 13% rally. We would not expect a PWG B wave to exceed that third level. We are also watching market breadth, and have some parameters there too. Interesting juncture.

Short term support is at the 2575 and 2525 pivots, with resistance at the 2594 and 2632 pivots. Short term momentum displays a negative divergence at today’s high. Best to your trading!

After observing TESLA  for a few years we have determined it trades more like a commodity stock (abc’s) than a growth stock, and have dropped it from our charts. In its place we have added a few things. Fed-Ex (pg. 13), Intelsat (pg. 14), and GBTC (pg. 13) the pink sheet Bitcoin ETF. Under commodities on page 8 we have added to Gold and Crude, the CME Bitcoin index and Soybeans. Biotech remains on that page. The Housing index has been moved to page 15 with the housing stats. New Year improvement? Possible.

MEDIUM TERM: downtrend

LONG TERM: downtrend probable

CHARTS: https://stockcharts.com/public/1269446/tenpp

About tony caldaro

Investor
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551 Responses to Wednesday update

  1. gtoptions says:

    The weekly swing from the SPX/2347 low completed at today’s high. Roll over now, or not?
    The market is providing some great setups. Good Luck.
    SPX ~ https://www.tradingview.com/x/APXgNKtt/

    Like

  2. fxaprendiz says:

    Business Cycle and Recession Watch Update 1

    I mentioned in my previous post the conditions that need to be met before a stocks market peak can happen and a recession follows. This will be the first post detailing where we are regarding those conditions. It will be a long road map, as it will take years for all 3 requirements to be present, so this is a long term exercise in projecting the end of this bull and the start of the next recession.

    1. VIX. No signal at present.

    The weekly SMA(20) has been climbing steadily for some months already, and it’s very close now to go over 20. Presently is at 19.19, so if volatility can remain elevated for a few more weeks it will go over 20 which will be the first warning sign of trouble ahead for stocks. Uber-bears don’t get giddy yet though; this average can and do stay elevated years before a recession ensues. It’s only the first of several signals that need to be present.

    2. Yield Curve. No signal at present.

    The yield spread has been flattening for some years and it’s now at 0.17

    While that chart looks scary, let’s consider this longer term chart:

    After the yield curve finally inverts, it has taken between 1 and 3 years or more for the last 5 recessions to happen, and with the exception of the 1980 and 1981 recessions, the curve is already positive by the time the recession is underway. So no recession in the horizon anytime soon.

    3. Economic Cycle. No signal at present.

    Economics Professor David Rice at econpi.com has done a great job at creating an average that integrates 19 economic indicators to gauge the health of the economy and the stages of the business cycle.

    This average is called the MoC or Mean of Coordinates, and it needs to be near or below the 0 baseline for it to signal a recession is imminent. It is currently at 34.4% which is very high, and it was at 35.5% in mid October, that was its highest value for the current cycle. Now, if you say “that’s the signal, the stocks peaked on October as well”, let me tell you that the business cycle needs to peak BEFORE the actual peak in the stocks market. So no cigar here either. The MoC has peaked between 1 and 2 years in advance before the stocks peak in previous recessions.
    In conclusion, there’s no foreseeable recession coming for this year, as all of the 3 indicators need to be in place at least 1 year before the stocks market peaks and a recession comes after.
    If you want to have a hint of how close the business cycle is to a recession, then keep an eye in the next chart, which puts in a visual way the state of the economy.

    Out of the 19 economic indicators that make up the MoC, 9 are already in the Decline Quadrant, and 10 still in the Expansion Quadrant, with the MoC itself lightly in the Decline Quad already. But it’s current value is very high as mentioned already, 34.4%. It would need at least a year to come down anywhere near recessionary levels. And it’s almost a certainty this is not the peak of the economic cycle yet, as there are several mini cycles within it, as you can see in the next chart.

    Notice how the MoC is moving upwards since the last recession in spiral movements, with the mini contractions in the economy being reflected when the MoC shifts to the left and sometimes it stays in the Decline Quadrant for some months, but then the bigger economic cycles resumes and takes the Moc to the right and into the Expansion Quadrant again.
    And for the ones of you that may be thinking “but how can we sure the final peak is not already in and we aren’t declining since then towards recessionary levels”, let me remind you that the business cycle always peaks way before the stock cycle do, so a simultaneous peak in September-October doesn’t cut it.

    I’m going to eventually post how the paths to the 2007-2009 and 2001 recessions went, so we can all see what to expect from these 3 indicators in the future. This post is already too long, sorry about that, but since it’s the first update about it I think I needed to explain some things in more detail this time.

    All of this matches well with my own count (that we are in a wave 4 from the 2009 low) and my expectations for a market peak until the year 2022 and a recession on that year or the next one. If you want to, add it as item number 4 in the list =)

    4. EW count. No signal at present. (Corrective wave 4 of Intermediate or Primary degree from the year 2009)

    Credits to next websites for the charts and tables:
    1. Marketwatch.com
    2. St. Luis Federal Reserve (fred.stlouisfed.org/series/T10Y2Y)
    3. econpi.com

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    • mcgcapital says:

      As you know, I’m a massive bear on these markets at the moment but this was an interesting read. I’ll provide a few ‘this time its different’ counter points:

      1. In prior economic cycles, regional/national economies were much less integrated. It wouldn’t have been unusual for the US economy to do one thing while parts of the rest of the world does another. But over the last 20 years, globalisation has made sure that all economies are intrinsically linked. Any instability in the system anywhere in the world can have a knock on effect much more easily than it used to.

      2. China is the systemic risk. They’ve taken on too much debt to fund their exponential growth over the last 10-20 years. After said growth, their economy is now 2/3rds the size of the US. The saying used to be that if America sneezes, the rest of the world catches a cold. That can just as easily apply to China now. All of the signs are that the data out of China is worsening. And that’s just the data you can trust. Some of their government data may well be bogus as well, so things could be even worse than reported. We won’t know until its too late and something bad happens.

      3. On volatility, I think ‘this time is different’ because you’ve had volatility suppression via central bank interference in markets via QE. And now they’re stepping away. Despite the recent jawboning around being patient on rate hikes, QT is still in play and there’s no real change in Fed strategy – they always have been data dependent when hiking, but its the balance sheet thats driving liquidity and stocks. If QE suppressed volatility, QT is going to amplify it. And that appears to be what’s happening as its been so much more volatile since QT started.

      I’d also say that any signal from the yield curve might not look the same as prior cycles because of central banks. Longer dated yields have been suppressed. I’m not sure it can be relied upon that it will give you an inversion pre recession this time. We got close a few times but it didn’t trigger.

      As for the economic cycle, this would look way different on a global basis instead of the US. It looks like production based economies are already heading into recession, Germany and China being prime examples and extremely important economies for global GDP. Consumption led ones are likely to follow. The ECRI leading indicators for the US are now sharply negative. I think the US economy slows quicker than realised by most people. With the US, some of the data may also have a positive spin on it because of the fiscal stimulus they did very late in the cycle. That drops out of the YoY data now as it was 12 months ago. Without Trump’s tax cuts the economy may have slowed already. Have to see how this progresses.

      As always, price is key to all of this and we need to let it decide who’s right. Since we broke down in December, everything to me looks consistent with my macro outlook. If we build a base somewhere and the Chinese manage to re-inflate their economy, then maybe I’m wrong. But for me, if this was an ongoing bull we shouldn’t have broken down the 2018 trading range in December i.e. hold 2550-2600. So bears in control until proven otherwise

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      • fxaprendiz says:

        Always a pleasure to read you mcg, even when you disagree with me.

        There’s no doubt this is a bears’ market and will be for the first half of this year. Also there’s no doubt in my mind that we will see a lower low. The only thing up for debate is the eventual final severity of the decline and whether it can trigger a recession or not.

        As mentioned I’m now open to the possibility of this correction being of one degree higher than initially thought. But if that’s the case, there are several examples of corrections of Primary degree that didn’t trigger a recession, the more extreme being 1987 with a 33% decline, so not all declines over 20% necessarily trigger a recession. I guess for most participants in this blog, with their tendency to exaggerate and extrapolate, a decline of 30-40% will feel like the end of the world so whether it causes a recession or not it won’t matter to them.

        But I’m digressing. Back to your points. All are valid counter-arguments and as you said, price will determine the final outcome. I agree the economy and markets are distorted since the rescue on 2009 so some usual metrics may not work as well now or not work at all to determine the proximity of a recession. But that’s precisely why I gathered 3 different indicators to help weed out false positives. one or two of them may fail but all 3 failing at once I find it hard to happen, especially the MoC which is actually an average of 19 indicators, so in a way is a super-indicator.

        It is true that the world is more tightly integrated economically now, but there are still different velocities in the rate of change within each economy. This may be the case of most of the rest of the countries deeper into their bear declines already, suffering recessions this year while the US avoids one this time, and then coming 2022-23 the US finally goes into recession and the other countries go into a second recession. There may also be the case that China is already in recession (as you said many of their stats can’t be trusted) and will come to start its recovery about the time the US markets bottom around mid year. Thus China wouldn’t drag the rest of the world with it if it recovers quick enough. Finally, as bad as it may sound as being politically incorrect, it may be that the US is the “lesser of the evils” when recessions erupt in Europe and elsewhere in Asia and LatinAmerica, so money end ups still flowing to the US that may keep its stock markets and economy afloat or not to decline as badly as the rest. Basically that already happened in the run-up to this situation, as you pointed out so many times, the markets in Europe initiated their declines much earlier and went down deeper leaving the US almost as the lone wolf, making higher highs. You may say the US will finally catch up with the rest at the bottom but it may just be the case it never goes into recession this year as the indicators still point to an economy decelerating but still growing.

        Before I forget, the ECRI Leading Indicators that you mention have given false positives in the past, twice at least. They went down in 2011 and 2012 to the same level they were in the 2001 recession, but no recession was triggered. This may easily be another case of a false positive by this Index.

        I know this is all just talk and given enough free time and disposition, anyone can find online the information that suits their thinking and put together a case for bulls or bears. Maybe I have a bias because my particular EW count calls for no recession until after 2022. I would like to say that I know economics in depth and I know what I’m talking about but that’s not the case. But I think it’s worth to tell the readers in this blog that maybe, just maybe, things are not really as bad as they may seem on the surface, and that even a 30-40% decline doesn’t necessarily mean an automatic recession, if the conditions don’t warrant it.

        I guess ultimately what I’m trying to do with this exercise is to put things in perspective and calm the waters, and give an alternative to the usual “new all-time-highs next month” and “all doom and gloom from now on” that many people in here are so fond of. It almost seems like there’s no room for middle-ground, which is funny to me because the middle-ground is mostly what usually happens, when all is said and done.

        As said at the start, always a pleasure to read you and talk to you mcg. I wish all the bloggers disagreeing with me were this polite and well-thought and knowledgeable. Then I wouldn’t mind debating hours on end.

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      • Jan Hatzius of Goldman says that the market is pricing in a 50% chance of a Recession.

        Hatzius’ says his model (which is a statistical model introduced by Fed researchers that translates the slope of the yield curve and credit spreads – – – into a market-implied recession probability is at only 15%

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  3. Jack kendo says:

    Tony Thanks
    Nice update on PWG
    $spx up 10% in 10 days.
    During 2008 bear market, PWG intervened, FED had emergency rate cut of 3 basis, $spx also bounced up 10% in 10 days, then rolled over to make new low.
    What a perfect match!
    Can we say PWG mission completed for +10% in 10 days as the guide line?
    Look at today, the last 5 minutes straight up, that probably was PWG’s final work to make the close above 10% for 10 days.

    Follow up on my extreme $NYMO reading from yesterday.
    Here are three extreme $NYMO readings in a bear market rally.
    1). July 2011, was 89.65, then $spx plunged 19% from there.
    2). Nov 2008, was 99.46, then $spx plunged 26% from there.
    3). Jan 2009, was 121.86, then $spx plunged 29% from there.
    Today’s $NYMO at 117.76, second highest is history. Nasdaq $NAMO made new ATH.

    No change on my Primary count with (ii) of 3 at today’s 2595.32
    $NDX made it to 61% retrace of Dec 3’s wave 2, that should be enough for the wave (ii) of 3.
    Next should be the crash wave of (iii) of 3, it matched the crash pattern I am following.

    I am aware of yesterday AAH’s mention of potential degrees violation with more points here.

    From yesterday my posted chart, Wave 2 at 2800 was a failed flat at 61.8%, took 24 days.
    Here wave (ii) of 3 took a much less time of 10 days with zigzag, and less than wave 2’s 61.8% retrace. Both time and retrace percentage are less than the larger degree’s wave 2.
    As time proceed, we can not just compare how many points retraced for degree comparison.
    For example, current bear market points of up and down are much much larger than 2008’s bear market, so using percentage as guidance is more proper.

    Alternate count of 1-2-3-4 invalidated, $NDX overlapped 10/29’s low, even though $spx does not.

    cheers!

    Like

    • Jack kendo says:

      We had WROC and Zweig thrust at the final week of Nov, then market rolled over for its strongest plunge in December since 1931 great depression.

      so, imho, Zweig thrust or WROC in a bear market is the climax of bounced top, and that should be sold into.

      cheers!

      Like

      • mcgcapital says:

        Agree… think about it this way. In a steady bull market with lower volatility, a huge ramp upwards triggering these signals signifies that there has been a shift in fundamentals which has led to investors chasing momentum (e.g. Trump election). Presumably a positive shift, and a positive fundamental backdrop is what drives higher stock prices. Thats why these signals work, not for the sake of the signal but because of what its signifying (improved fundamentals).

        In a high volatility market such as this where price is doing extreme things, massive sell off in December (despite markets being unable to crash in December) followed by a massive counter rally, these shifts in momentum are par for the course. They aren’t being driven by a change in fundamentals but instead by technical factors such as an oversold bounce. No change in fundamentals = no change in long term trajectory of stock prices, so the signals are completely irrelavant, and as you say, they like trigger after large rallies which are the perfect place to re-short.

        People need to use their brains before blindly following statistics. Common sense is important, always question any statistics you’re presented with

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    • aahmichael says:

      I agree that it must be measured in percentages. The market rallied 7.5% in your wave 2 from 2604 to 2800. It rallied 10.6% in your wave (ii) from 2347 to 2595. Those are the percentages that matter.

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      • Jack kendo says:

        aah, the way I see is not absolute points or absolute percentage, it’s relative term, the retrace percentage, meaning 50% or 61.8% or ..% retrace of current degree.
        From my study, in history, there are some examples of smaller degree wave (ii) bounce up with larger points and percentage gain than the larger degree wave 2. Then it proceeded with 3 of 3 crashes.

        Most important, as I said: it matches the crash pattern I am following.

        cheers!

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        • aahmichael says:

          A market doesn’t have to be in a wave 3 in order to crash. There is no difference between a wave C crash and a wave 3 crash, other than what it does after that wave is completed.

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    • xEVAx says:

      Leading diagonal in wave one??? Thats the only one that kinda works for me but none really work until we take out the low and close below it….. Futures are in the red, thinking 100 point gap down…. Take out the low and then some with 3, then 4 back into hope range and then 5 of 1 down, clean impulse with extension to 1800, for P1…. This is the super bear count =)

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  4. lunker1 says:

    Hi Tony, do you have a date or a link about the PWG meeting in 1990? I cannot find anything on it. this is all I got. thank you

    https://www.treasury.gov/press-center/press-releases/Pages/js1002.aspx

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    • tony caldaro says:

      They are generally secretive when they meet
      Mnunchin was nice to let us know in advance

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    • lunker1 says:

      Tony,
      Also the Dow in 1990 went from a high of about 3025 down to 2350 approx -22% in 3 months.

      It then took 2 months to go from 2350 to 2650 (13%) in perhaps a Leading Diagonal, but however it then quickly retraced down to 2450 in a month (somewhat revisiting the lows). Respectfully I would disagree with the “it kept going higher” description

      Then in mid January 1991 the market had a large gap up perhaps from a positive outcome from the war and the price was quickly back into the 2600s

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  5. Futures were down,had an implied open of -9. its now 7 pm, time for ppt to go to work and push everything green.msomwe can head higher tomorrow

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  6. aahmichael says:

    Today the market failed to make it back to 2600, and I think that’s a big deal. 2600 was the scene of the last massacre, on 12/17, before the market fell into a black hole down to 2347. I doubled my short position today, and I’m maxed out on short side now. I was hoping to double up at 2598, but the market didn’t cooperate, so I had to do it a little lower. It’s a zig-zag up from 2347, and (c) is still shorter than (a), but even if the market is able to make it up to (or through) 2600 overnight or tomorrow, I did not want to take the chance of being flat here.

    Like

    • Just checked, futures down 15 points, great call.

      Like

    • Aahm: I have always counted the first decline leg from 2940 to 2604 as a zigzag, and could not find a legit way to count it otherwise; similarly, the second leg from 2800 to 2346 is better counted as a zigzag too, with good symmetry & ratio. IMO, the correction of W[4], a DZZ, is over, and now a new bull market started from the 12/24 low.

      Like I noted to you a couple of days ago, the first series of the current rally to 2520 is an almost perfect LD. Yes, the entire rally from 2346 is a zigzag as of now, but all my indicators point to that 2595 is a w(3) high, with w(5) to come early next week at around 2626. I hold short position now, but will change to long position once this w(4) is over. GL.

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  7. Just curious.

    Does anyone here trade individual stocks at all?
    If so, which ones and how actively?

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    • In this current climate I play the earnings game and short notorious pus & blister stocks at earnings. TSLA AAPL GPRO NFLX. Still have yet to nail Tesla….

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    • Bluehorseshow, I trade individual stocks, esp. puts to the downside. NTAP is a great short. Selling my longs pretty fast here because think market might back off, and some go with index moves and others against it.

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      • What are you using as your T/A on NTAP?
        EW?

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        • Bluehorseshow, I don’t use EW, I use patterns, and do use retrace levels. NTAP targets are down to 42. I hold 50’s and 45’s for & June wanted to load up more today. NTAP on daily is a downward sloping H&S that started numerous months ago. My puts have hit twice already, and I’m working it a 3rd time. Look at openinsider.com and see where CEO sold 83% of his stock in Nov. Not a bit of buying in it, ALL are selling. Ripe set-up for downward continuation. I really like buying puts a lot more with heavy insider selling in a stock. You can actually scan for this on Finviz.

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    • Valerie wapiti says:

      SQ, TSLA, NVDA, FB
      Most active in SQ, NVDA
      Tsla trades in a wide but reliable range (reliable so far) and is an ocassional day trade.
      SQ is a swing trade.
      NVDA and FB day trades.

      Like

  8. xEVAx says:

    Not much confidence in anything right now, SO for Da Bears there is this…. Need to get moving straight down and then Id need to see extension and impulsive down and down and down…. That would be wave 1…..

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  9. phil1247 says:

    we have pushed above the 2595 previous extension long target
    creating a new extension …………….

    the new extension long is bullish above 2551 march futures
    rising wedge forming ?
    we are grinding up into the potential short with 2627 the .618 resistance
    resistance there cannot be proven until the extension long fails at 2551

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