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S&P 500 E-MINI FUTURES, beginning of the end

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CME_MINI:ES1!   S&P 500 E-mini Futures
The stock market... Where to begin... I would say that it's strange and unexpected how the market had such a powerful recovery after the onset of the global pandemic, but it really isn't strange or unexpected. When you consider how and why the market got to where it is in the first place, it all makes sense. The answer is simply the Fed. When the recession of 2008 hit, the Fed stepped in with quantitative easing — three rounds to be exact. During QE one, two, and three, the Fed created approximately 5.5 trillion dollars. That money was used to buy treasuries and bad mortgage backed securities, but ultimately, the majority of it filtered it's way through banks, into the hands of investors, and into the stock market.

It's important to note that leading into the pandemic, there was a quiet collapse of the US banking system, when interest rates in the "overnight repo market" suddenly spiked from 2% to 10%. This was due to banks across the country running out of reserve capital, forcing other banks to increase their interest rates by 500%, in order to compensate for the elevated risk of lending capital to other banks. The Fed immediately stepped in and created upwards of a trillion dollars in new capital, so that banks across the country could meet their reserve requirements. Then, when the Pandemic hit, the Fed and the US Treasury assisted the US government with over seven trillion in stimulus. That's in addition to the trillion plus that was created to temporarily feed the reserve requirements of banks around the country. The money that has been created this year alone, dwarfs everything that the Fed pumped into the market during QE one, two, and three. So, it's no wonder that the market has shown such a strong recovery. All of those trillions were filtered right into stocks, and the prices reflect it.

Despite that, things are looking strange in the technicals. Here on the S&P500 weekly chart, you can see that the the S&P has printed an enormous broadening wedge over the past two years (a rare formation for an index) showing extreme indecision among investors. Furthermore, we can see that the RSI and the money flow have both been forming consistently lower highs, while the market has continued to print higher highs. I think the exhaustion of bulls is evident here, despite how powerful the market looks. The S&P is in all time high territory, and it could definitely head even higher. Fed Chairman Jerome Powell has made it clear that "The Fed will support the market indefinitely," and one of the most famous rules in trading is "don't fight the Fed." They're trying to generate inflation right now. Obviously, their primary method is by dramatically expanding the money supply, and while money supply expansion will temporarily elevate stock prices, I can't help but realize that the extent of it, in the face of uncontrollable debt acquisition, will result in a terrible ending. They say don't fight the Fed, but the Fed is playing with fire at this point. Who knows how long the house of cards will stand? All I know, is that the current course of action is unsustainable — without question.

The reality of this chart is that price action appears to be breaking out above the broadening wedge pattern, while at all time highs, and while indicators continue to print huge bearish divergences. The key to this chart, is paying very close attention to whether or not price can stay above the broadening wedge . If it can, there is a good chance stocks could rip higher regardless of the bearish divergences, as the Fed continues to pump the market with fresh cash. On the other hand, if price fails and falls back into the broadening wedge formation, I think the exhaustion in the market could produce a violent selloff.

Comments

Great analysis!
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Superb writeup - thanks!
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Amazing work, i agree 100%
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