The equity markets are showing quite the divergence as the charts of the US major indices are beginning to look different for us technical traders. The Nasdaq has been doing its own thing. Many analysts saying the move in tech has been a bubble. The debate is whether it is fund managers chasing “growth” stocks, or is it really the new retail Robinhood crowd traders creating this move.
In my opinion, I am seeing evidence it is mostly the new retail crowd on Robinhood…which means there may be some pain incoming. Just following the charts lately, I have seen plenty of examples of price retesting break outs quite deeply, and a lot of whip saw like moves. Some argue this is because we are in the Summer price action period. However I see evidence of established institutional and experienced traders setting traps to shake out the inexperienced and weak hands of the new retail crowd. Tesla earnings will be crucial in proving my observation to be true or false. Is the run up in price due to expectations of great earnings? Seeing fund managers buy in. Or is it just the retail crowd which means a bad print would cause a pretty substantial and violent sell off in the stock.
In terms of the Russell 2000 and the Dow Jones, they have bounced off of major support zones which I have detailed in the past. As long as those zones are held, we remain in an uptrend. Both equity markets did break out of near term resistance so we will see how the momentum carries forward this week.
The S&P is what I want to talk about, and I believe it is the equity market to be watching AND is weighing in on all asset markets.
The S&P 500 is back at the Wuhan zone. What do I mean by that? If you look back to February, it is where price broke below the higher low to end the uptrend and caused that incredible move down. We recovered all of that and retested this zone in June but could not break above. Look at the rejection in June.
Well, we held support at 3000 (a major flip zone) and then came back up to retest this Wuhan zone. In the past week, we attempted to break out in 4/ 5 days of the week. There is a battle going on between the bears and the bulls, and what happens here, will affect other US markets.
So what could happen here? Do we see a break out above which would lead to a test of previous highs at 3400 before breaking above and creating all time new record highs. Or do we see a reversal pattern…more on that below.
My fundamental thesis remains the same: the only thing which can bring this market down is a black swan. Either we see a financial failure or a geopolitical event. It is now confirmed that large institutions are playing the markets…and doing well. Large banks in the US released better than expected earnings (except Wells Fargo) as their trading business and profits made up for consumer lending. Some like Goldman Sachs saw their trading revenue increase by 93%! Why lend money when you can make more money trading? This is the environment that has been created by the Federal Reserve. Cheap money for a long time forcing money to go into stocks for yield. Also, I spoke about this before, but the theory the Fed is using repo to give money to these banks under the table so that they can then buy stocks and bonds, making profit and paying back the Fed, has gained some steam.
Now if we do manage to see some sort of rejection at this resistance zone…maybe say on news about the US China trade deal, what can we expect?
My students are already seeing the set up as it is meeting a lot of our criteria.
If we reject then there is a possibility of a double top pattern trade. But we must await the trigger which would be a break below the strong flip zone at 3000. This needs to happen to confirm the pattern because we could pretty much just end up ranging between these two zones.
To be honest, this second scenario is an Uncharted set up. It meets a lot of criteria in terms of our market structure guidelines. But that break is key which means for the time being, we will be patient and trade the other markets that are presenting opportunities.
On a final note, I want to leave you all with this chart of the German Dax. Compare it with the daily chart of the S&P 500 above. Carbon copy. We can use these charts as a leading indicator if the other does not break out. If we see a break in the Dax, perhaps we will see a break and follow through in the morning on US equities. Keep an eye on this.
In my opinion, I am seeing evidence it is mostly the new retail crowd on Robinhood…which means there may be some pain incoming. Just following the charts lately, I have seen plenty of examples of price retesting break outs quite deeply, and a lot of whip saw like moves. Some argue this is because we are in the Summer price action period. However I see evidence of established institutional and experienced traders setting traps to shake out the inexperienced and weak hands of the new retail crowd. Tesla earnings will be crucial in proving my observation to be true or false. Is the run up in price due to expectations of great earnings? Seeing fund managers buy in. Or is it just the retail crowd which means a bad print would cause a pretty substantial and violent sell off in the stock.
In terms of the Russell 2000 and the Dow Jones, they have bounced off of major support zones which I have detailed in the past. As long as those zones are held, we remain in an uptrend. Both equity markets did break out of near term resistance so we will see how the momentum carries forward this week.
The S&P is what I want to talk about, and I believe it is the equity market to be watching AND is weighing in on all asset markets.
The S&P 500 is back at the Wuhan zone. What do I mean by that? If you look back to February, it is where price broke below the higher low to end the uptrend and caused that incredible move down. We recovered all of that and retested this zone in June but could not break above. Look at the rejection in June.
Well, we held support at 3000 (a major flip zone) and then came back up to retest this Wuhan zone. In the past week, we attempted to break out in 4/ 5 days of the week. There is a battle going on between the bears and the bulls, and what happens here, will affect other US markets.
So what could happen here? Do we see a break out above which would lead to a test of previous highs at 3400 before breaking above and creating all time new record highs. Or do we see a reversal pattern…more on that below.
My fundamental thesis remains the same: the only thing which can bring this market down is a black swan. Either we see a financial failure or a geopolitical event. It is now confirmed that large institutions are playing the markets…and doing well. Large banks in the US released better than expected earnings (except Wells Fargo) as their trading business and profits made up for consumer lending. Some like Goldman Sachs saw their trading revenue increase by 93%! Why lend money when you can make more money trading? This is the environment that has been created by the Federal Reserve. Cheap money for a long time forcing money to go into stocks for yield. Also, I spoke about this before, but the theory the Fed is using repo to give money to these banks under the table so that they can then buy stocks and bonds, making profit and paying back the Fed, has gained some steam.
Now if we do manage to see some sort of rejection at this resistance zone…maybe say on news about the US China trade deal, what can we expect?
My students are already seeing the set up as it is meeting a lot of our criteria.
If we reject then there is a possibility of a double top pattern trade. But we must await the trigger which would be a break below the strong flip zone at 3000. This needs to happen to confirm the pattern because we could pretty much just end up ranging between these two zones.
To be honest, this second scenario is an Uncharted set up. It meets a lot of criteria in terms of our market structure guidelines. But that break is key which means for the time being, we will be patient and trade the other markets that are presenting opportunities.
On a final note, I want to leave you all with this chart of the German Dax. Compare it with the daily chart of the S&P 500 above. Carbon copy. We can use these charts as a leading indicator if the other does not break out. If we see a break in the Dax, perhaps we will see a break and follow through in the morning on US equities. Keep an eye on this.