History and Introduction
Everyone in the market today remembers broadly the financial response to C19. It We see it every time that we look at the price chart and we see the spike down and the V recovery. What a lot of people may not remember is the investigation into SoftBank for essentially causing a short squeeze by use of call options and gamma hedging. When that news story came out my long term assumption was we would be returning to the C19 low and that has informed every idea I have put out since then.
News story
investmentwatchblog.com/the-sec-confirms-it-is-investigating-softbank-for-market-manipulation-softbank-spent-17b-worth-of-shares-in-the-us-tech-market-with-another-3-4b-in-bets-to-prop-up-their-prices/
An Explain Like I am 5 From Reddit
When you write a call as a seller you essentially take a short position against the stock delta wise[.] When SoftBank bought loads of calls that were out of the money then the writers had large negative delta positions against these tech stocks.
One common way to offset a negative delta is you can hedge with owning shares to offset the negative position from the calls you write. As the calls were heavily wrote then shares were added to offset risk which contributed towards momentum. As the stock positions were entered it drove up price of stock which put those out of the money options closer to the money leading to more share purchases while SoftBank continued to purchase more and more calls leading to an increased share price between delta hedging and general market momentum. Someone can correct me if I’m off but that’s my broad description
reddit.com/r/options/comments/iofl2h/explain_like_i_am_5_softbank_stock_manipulation/
Essentially when that news story came out I, personally, understood all these gains were unsustainable and were going to be given back. This was in addition to all of the other stimulus spending that was going on. There was still gains to be made or lost speculating in swing trading but my ultimate goal was to not buy the top and not to sell bottoms.
Main Chart Analysis
The main chart has been left pretty simple. We have the Gaussian Channel on top and we can see that in the 70s there were two points in time investors or traders got to buy below the gaussian channel. Fortunes could be made by buying below the channel and merely selling above the guassian channel. Loading up on dividend stocks would have also been very prudent. We can also see the opportunity came again in the 2000s.
We can also see in purple the tops where the ADX has been at 20 or below. The 70s dip had the low ADX but the 2000s did not. It is not a necessary condition that the ADX be low for price to go below the gaussian channel, but it is suggestive that with the current low monthly ADX we have a fair shot of getting there.
We also see that similar to the 1970s the ADX has been declining over each high for over the last decade. Not a good set of circumstances to be in.
The right side of the chart shows the double top itself without any indicators and on the weekly time frame. As it stands right now it looks like a “lower high” double top but price could rally up 17% from the current level and this idea is still valid. The last top took over 300 days to develop and start to sell off to create the valley low. We can still have a significant amount of sideways as bulls get exhausted.
Double Tops
Double tops are suppose to have a flat base before the uptrend begins and then return to the flat base per Bulkowski, who is broadly considered to have written one of the modern trading “bibles.” thepatternsite.com/dtstudy.html
The chart below shows what I consider the flat base to be. The fib draw on the double top does get us right into that range. Another thing to remember is that we don’t need to see an impulse that looks strait down. It is quite probable that price action takes out the valley low and then rally to test previous support as resistance.
Here is an example of a double top on bitcoin from the 2018 bear market. The 4-hour chart provides the detail of a double top that developed over 25 days from the time the began to top to rejection oat previous support.
So, not only could price action go sideways for some 300 days as the second half of the double top is created, but once price sells off we could spend considerable time in a suckers rally as price returns to previous support and tests it as resistance.
Quarter Chart
Long term, we have a chance to buy in the quarterly gaussian channel. This would require significant sidewise-ish or channel-ish price action for a decade.
Dow Theory
Basic Dow theory on bull markets has three phases, accumulation (smart money), public participation, and excess. From there we enter distribution, public participation, and panic. One tenant of Dow theory is indices must confirm one another. investopedia.com/terms/d/dowtheory.asp
My linked idea will show that I thought that NDX would have a bull trap. That idea has been invalidated because rather than forming a classic bull trap NDX is likewise in a double top. But having both NDX and SPX in a topping formation suggests that we are in distribution.
Since we are talking about Dow theory lets look at the DJI. T Guess what? he Dow looks like it is in a double top as well. Having all three indices appear to be topping within 5 percent of previous ATH is pretty bad.
NASDAQ/S&P
Since the Nasdaq is more volatile than the S&P we can look for bearishness in the NDX/SPX pair to see broader bearishness in the market. I am personally staying away from the Nasdaq as an investment as possible until it reaches its own double top target against the S&P.
Crypto Assets
Since I believe the SPX is a index that could be topping for over 300 days and having several consolidations on the way down I would expect some assts to go crazy as investors rotate and individual assets have blow off tops. I expect some massive rallies with some select cryptos and then a lot of despair. A lot of movement can happen in crypto over the lifespan of this idea.
Here is bitcoin. What is the traditional target of a rising wedge? The beginning of the wedge. And there is no guarantee that bitcoin will set a higher high. If it does I am selling and probably never returning.
Conclusion
As someone who thinks the United States have been off sound money since the creation of the Federal Reserve I see all of this as the consequences of late-stage socialism. Subsidies to support government initiatives, transfer payments, bloated public services, debasement of the money supply all lead to public excess in the stock market. The United States as been more resilient than a lot of other countries in warding off the pernicious influence of socialist actors but once the Federal Reserve was created the ultimate conclusion was clear, it was just a matter of timing. Of course, due to inherent theory and model failure of most socialists they don’t realize it is the socialist policies that got the market here. Just like most don’t realize we are in distribution.
The distribution phase can take a long time and I expect to be ignoring a lot of news. It’s a distraction. I am going to make the trades and investments as I see them. The main chart focuses on what happened to the SPX in two bear markets, one in the 70s and another in the 2000s. What happened to sound money (precious metals) in the 70s and 2000?
Quite simply they went crazy. What happened to the Gold/SPX ratio? They reached muti-decades lows. If the SPX is topping then I would expect to see a massive upside pattern on gold. And I do. There is a cup and handle or ascending triangle. Based on that the time for me to rotate back into the S&P generally would be when the SPX/Gold ratio hits a double bottom from the low of 2011
Likewise with Silver and the S&P
I think it is a decent time to take my kids to the precious metals store.