Why do we always say "this time it's diffrent' ?? Why, whenever a bubble was forming, people said it is not a bubble? Probably because our human desire to see the world (in this case financial markets) through utopic eyes, is stronger than our ability to see what is right in front of us, hence the problem everyone encounters, the trading psychology.
William Faulkner once said “The past is not dead. In fact, it's not even past." I believe this is the best description you can possibly come up with for the current US stock market. It's not visible on my chart, unless you zoom out a bit, but this correlation has been going on for a while, and I believe it is amazing!
Of course, every correlation at some point stops, and who knows, maybe it will stop very soon, this meaning we won't see the current bubble burst. But, and there is a but, I chose to publish this chart because I see a market that is hesitating at a strong resistance level.
Let's look at the current indices, without caring about the past, ignoring the correlation. We had a big selloff followed by a very strong rally. The DOW corected 78.6 % fib of the selloff. Everybody is forecasting good weeks for stocks, including the macro analyst that I watch closely and I trust. I don't like H&S patterns, I think they are unreliable, but this time I am considering for two reasons : first is the correlation but I said we are ignoring that for the moment, the second reason is the perfect price action. HH - HL - HH perfect uptrend ; followed by a LL - possible LH which is the perfect downtrend. If this Lower High is going to be confirmed, I believe the comming weeks will not be good for stocks. Now let's look at the S&P. Correction covered 100%, currently we are at the previous resistance and hesitating. A very nice Double Top (yes, I know double top formation is considered after closing below the previous support, but I like to call it a Double top from the beginning). The MACD allready confirmed the class B bearish divergence, histogram allready heading down. The candles show weekess, but the same as the DOW, there aren't some very strong bearish candles that will stick right out in front of our eyes.
I think both indices point to a correction. Normally I would not consider trading such patterns, but we have our 1929 correlation. Even if the bearish signals are not strong, I trully believe that it is worth shorting the american market, only because of the correlation. Think about it for a moment. It has been going on for a year now and the current level gives us an excellent risk reward ratio. In 1929, from the right shoulder at 357 to the first low at 212 the DOW lost 40%! Of course, it is hard to believe we can see today such a correction, but even with a smaller one, the risk reward ratio is fenomenal!
When the market opens, I'm going to open the smallest short position my broker offers, it will be like playing the lottery, I won't care about it because I will risk only a tiny bit of capital. Besides this short, I'm going to look for STRONG bearish signals that I usually trade, cause we don't have them yet (let's say except the divergence on the S&P)
Comments
Stocktracker1
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Sorry, but the period you labeled on your chart as hesitation, should be relabeled as market manipulation! I believe at this period, there were a lot more money put on the short side of the table than on the long side and guess what happen. The market went up! And the market manipulators are not done yet, as soon as they finish hitting all the stops and force the shorts to cover their bets, they will take the market down, maybe as soon as this coming week!
Kumowizard
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Believe me, there's no conspiracy here. This is not due to "manipulation", but simply due to people's idiotism and greed. There's no fear at all, as they believe FED will always back them. This is the last phase of the bull mkt we see now, I think only dumb money (or none sophisticated investors) are buying now. They buy, buy and buy. Short players have been giving up, no major shorts left. At some point it will all collapse under its own weight... and still, there will be no manipulation, just simply total fear will rule the mkts, and later they will blame it on something, like Ukraine, or China or whatever. This is purely part of human nature: fear, greed and extreminity. So simply put, long term there are no secret forces behind, who generally drive mkts based on a pre-agreed, or well planned scenario.
vlad.adrian
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Hello Stocktracker, you and me are too small to know what is actually happening, so I refuse to think about manipulation, arbitrage or whatever else there is. Take for example the forex market. Let's say NFP surprises and comes out well (it's only an idea, I'm not reffering to the current month or year), dollar should go up, but it doesn't because investors blah blah blah and they don't see the dollar strengthen because blah blah blah. How is this logic?? How could we know that the dollar wouldn't strengthen after a good NFP?? Well, we coulnd't. Same here, we can't know what the investors are actually thinking. We can only bet once we see a move in the market. This trade, as I said was only lottery, there wasn't a clear sign for shorting. Why the market continued to rally, well I don't know... As Kumowizard said, I also expect a strong correction or even the end of the bull market soon. I thought it was going to come when I posted this chart only because of the correlation with 1929. When will it come?? Well, who knows??
Will_Wong
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What do you think about the higher high (record high) for the SPX and subsequent sell off at around 2:30 PM followed by a V-Shaped recovery to close?
vlad.adrian
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Honestly, I'm puzzled and I can't figure out whats next. I'm waiting for Chinese PMI in 2 hours. That was the trigger of the last selloff.
Will_Wong
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Crazy market isn't it? I think there is still a lot of fear in the market and many decided to take profits at the peak.
vlad.adrian
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I refuse to think about the reason why markets go up or down too much, so I have no ideea why the Dow continued to rally. If it would fall, I wouldn't be able to tell you why. I concentrate more on the technical picture.
Kumowizard
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Very true. QE power :-)
However I think it is not the Dow that has to be sold. It is the Nasdaq100, or the broad SP500. Nasdaq stocks pxing is amazing anyway.
What about rel. value trade, without betting on general direction? So Buy Dow vs selling SP500 and/or Nasdaq100? Either the bull goes on and then Dow will catch up a bit, or pxing will get back to normal, then the overbought SP and Nas100 will do bigger correction.
vlad.adrian
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To be honest I didn't think of that, but you do have a point and I'm going to look into it
vlad.adrian
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Hello Kumowizard, I did as you said, the same day, on a demo account cause I don't have experience in arbitraging. A week passed and I have to say it was a great ideea. I looked over the results every day and I was never on a loss, only on profit! I will post the final results once I consider the fall took place. Even so, making profit without a fall is great so thank you for sharing the ideea!