In the last 4 weeks (since it reached 2020 on the Japanese Surprise Stimulus), the resilience of SP500 orchestrated by a possible sovereign QE in Europe has forced us to look at upside scenarios.
Note 1: Oil, HY, Venezuela, Greece, Japan, Apple and China have had dramatic trading in the last few days. Breather or Start down?
Note 2: EUR looks technically like a buy. Will Draghi have issues delivering his QE?
Note 3: Bund still pointing up. Would it climb in a proper risk off scenario? Bund is a great short in the 156 area if it can reach it (50bp rates on the 10y).
Key speed limit assumption:
–The Speed limit defined by the logarithmic line joining 6 tops over 4 years (Apr10, Feb11, May11, July14, Sep14, Nov14) shall cap the market whatever you throw at it.
- This assumption means that the upside from top to top is limited to 1% per month (not very exciting compared to the 14%/6weeks rally that sp500 enjoyed between mid October and end November.
Dynamics around that speed limit:
- SP500 has been hugging that line since June14 (6months, 3 tops). There was some doubt as to its relevance last week while Europe was ballistic but now we know the answer: it holds.
- Would the market give us new opportunities to short with higher confidence against the same line 1 to 3% higher than last top (in 1 to 3 months that is). This would be really beautiful.
Upside:
- Whichever the path: the Perfect top would be 2150/2220 between Apr15 and Jul15 (“linearly” in between).
- That would provide the most easy short ever (if you did not get fried before of course) – wouldn’t this be too easy for longs to get out after completion?
- Note: Adjusted by inflation, the 5 year rally from 2009 to 2014 is exactly equal to the 5 year rally from 1982 to 1987.
- Although I have to show the possible scenario to 2150 in April 2015 to avoid looking entirely stupid if it occurs, I am suspicious it won’t happen.
Support zone
any of those could retain the market if there is another leg up:
2020, 1980, 1940, 1914
Corrections structure:
- In fast breathers, the bulk of the correction occurs within 30 calendar days and the last 3 days can be the most nasty.
- Here the correction has started on the 5th of December. So the max time target if this is the beginning of a sharp correction would be the 5th of January.
- A collapse in the next 20days would be very anti-seasonal.
Conclusion:
- At this stage the rally is still in place and there are news ahead (ECB QE, US Macro data acceleration) that could justify higher projections to 2150/2220.
- Although corrections of 20% are rare events (10 times in the last 30 years, 5 times in the last 7 years), it seems to me that ingrediants are gathered for this event.
- if this event is due, will it occur when it is obvious (i.e when the max scenario technically and fundamentally is priced in)? Or will it occur in a more surprising form?
Trading
I am staying short until the 19th of December to see how this correction plays out.
1980/19dec is the reasonnable scneario and I may take profit on shorts at that level/point of time.
What my trading is not prepared for is a collapse between the 20th of dec and the 5th of January. I may buy cheap 1800 January calls on the next rebound.
Note 1: Oil, HY, Venezuela, Greece, Japan, Apple and China have had dramatic trading in the last few days. Breather or Start down?
Note 2: EUR looks technically like a buy. Will Draghi have issues delivering his QE?
Note 3: Bund still pointing up. Would it climb in a proper risk off scenario? Bund is a great short in the 156 area if it can reach it (50bp rates on the 10y).
Key speed limit assumption:
–The Speed limit defined by the logarithmic line joining 6 tops over 4 years (Apr10, Feb11, May11, July14, Sep14, Nov14) shall cap the market whatever you throw at it.
- This assumption means that the upside from top to top is limited to 1% per month (not very exciting compared to the 14%/6weeks rally that sp500 enjoyed between mid October and end November.
Dynamics around that speed limit:
- SP500 has been hugging that line since June14 (6months, 3 tops). There was some doubt as to its relevance last week while Europe was ballistic but now we know the answer: it holds.
- Would the market give us new opportunities to short with higher confidence against the same line 1 to 3% higher than last top (in 1 to 3 months that is). This would be really beautiful.
Upside:
- Whichever the path: the Perfect top would be 2150/2220 between Apr15 and Jul15 (“linearly” in between).
- That would provide the most easy short ever (if you did not get fried before of course) – wouldn’t this be too easy for longs to get out after completion?
- Note: Adjusted by inflation, the 5 year rally from 2009 to 2014 is exactly equal to the 5 year rally from 1982 to 1987.
- Although I have to show the possible scenario to 2150 in April 2015 to avoid looking entirely stupid if it occurs, I am suspicious it won’t happen.
Support zone
any of those could retain the market if there is another leg up:
2020, 1980, 1940, 1914
Corrections structure:
- In fast breathers, the bulk of the correction occurs within 30 calendar days and the last 3 days can be the most nasty.
- Here the correction has started on the 5th of December. So the max time target if this is the beginning of a sharp correction would be the 5th of January.
- A collapse in the next 20days would be very anti-seasonal.
Conclusion:
- At this stage the rally is still in place and there are news ahead (ECB QE, US Macro data acceleration) that could justify higher projections to 2150/2220.
- Although corrections of 20% are rare events (10 times in the last 30 years, 5 times in the last 7 years), it seems to me that ingrediants are gathered for this event.
- if this event is due, will it occur when it is obvious (i.e when the max scenario technically and fundamentally is priced in)? Or will it occur in a more surprising form?
Trading
I am staying short until the 19th of December to see how this correction plays out.
1980/19dec is the reasonnable scneario and I may take profit on shorts at that level/point of time.
What my trading is not prepared for is a collapse between the 20th of dec and the 5th of January. I may buy cheap 1800 January calls on the next rebound.