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Wednesday, 5 February 2020

The January Barometer

When I looked a few weeks ago at the stat for the first five days of the year I found that the correlation with the yearly close there was essentially random, so I was wondering when I had a look at the full January Barometer stat whether I would find the same but was pleasantly surprised when I did not.

The numbers I was looking were from 1950 to the present, so that's a good statistical sample, and in that time 72.86% of years closed green, and 27.14% of years closed red, with 61.43% of Januaries closing green in that time and 38.57% of them closing red.

I've looked at the numbers for continuation from those January closes, so in the event that January closed green, then a continuation would be that year closing higher than that January close, not just closing green for the full year, and the same for bearish continuations after a red close in January. On that basis the odds of a bullish continuation into the yearly close were 83.872%, well up from the average 72.86%, and where a January closed up over 2% then that strengthened further to 87.1% odds of the year closing up from there.

In the event of a red close in January, that delivered 40.74% odds of continuation down from there into the close for the year, up almost 50% from the average but obviously still significantly less than even odds of a red close. Now January this year closed red of course, but very marginally, only by 0.2%, so I have also had a quick look to see how many red January closes were 0.5% or less, and how they performed afterwards. Unfortunately there were no other instances so I expanded that to closes less than 1% or less and there were four. That is too few to be a reliable number really but for what that's worth three out of those four closed red, for an average decline of 17.5%, helped along by one of them being January 1974. The other closed up less than 2% in 1984.

Overall the January Barometer is a solid stat that has delivered good results in the past and may well continue to do so in the future. On to the markets.

As it is likely after today's gap up and go that we are looking at a reversal candle this week, that puts the historical odds from the last ten years at about even between continuation up to resume the broken weekly upper band ride or resumption of last week's downtrend in the near future. For reference that would involve at least a near miss of the weekly upper band soon and that is currently in the 3385 area. A hit there in the next week or two could deliver a continuation of the strong uptrend over the last few months though I'm doubtful about that. I think the odds favor a resumption of last week's downtrend after this spike up has blown out, though likely we will need to see a new all time high on SPX before that, which was missed by 0.19 handles at the high today, though a new all time high was made on ES after the RTH close.

SPX weekly chart:
On the daily chart SPX closed over daily upper band today and we may well see the retracement we didn't see today tomorrow instead. There is some support for that on the shorter term charts.

SPX daily chart:
On the SPX 15min chart my channel resistance trendline was broken by the gap up this morning, and that has expanded into an even nicer rising wedge resistance trendline. If that survives tonight, unlike yesterday's resistance trendline, then then the obvious next move would be a test of the rising support trendline from Friday's low, which closed today in the 3305 area and is rising at about four handles per hour in regular trading hours. If that wedge support breaks then this move might be over, though I don't think that any SPX high here that failed to make a new all time high would last long. I can't recall any instances offhand from the last decade at least of a high on SPX lasting more than a couple of weeks where ES had made a new all time high and SPX had not.

SPX 15min chart:
On the futures charts I have decent quality possible 60min sell signals brewing on ES, DAX and ESTX50, though obviously they would need some kind of a retracement to fix, and that negative RSI divergence might be lost soon if the equity futures continue falling upwards the way they have the last two days.

ES Mar 60min chart:
On NQ and RTY those 60min sell signals have already fixed and both of the last two retracements including last week's move started with a 60min sell signal on NQ alone, so I'm watching that with particular interest.

NQ Mar 60min:
My lean is towards more downside and that's only in part because I'm not seeing any evidence that the coronavirus situation isn't likely to get a lot grimmer over coming weeks, if only because the virus incubation period almost guarantees that the confirmed case numbers are likely to get at minimum an order of magnitude larger.

That being said, there is never any certainty in market action and this has been a very persistent uptrend, perhaps because (not officially) QE4 has been pouring record amounts of liquidity into markets since October. That's still ongoing and China has added another $250bn of liquidity and stimulus to that this week.  That's a lot of money and it that's certainly been having a strong impact since yesterday's pre-market announcement from China delivered the strong gap up yesterday morning.

On Friday I'm planning the third post this week crunching the coronavirus numbers and considering the virus news. I'll be doing a market update then too, so by that stage we should have a better idea whether any retracement is possible on equities this week other than the impressive retracement we finally saw on TSLA today.

Tuesday, 4 February 2020

A Feast Of Numbers

Between cancer treatments (for my wife) and some serious IT issues I didn't manage a post last week, and have a bit of a conundrum this week as the post I'd ideally like to have published today would have involved too many charts and and an likely indigestibly large quantity of numbers for a single post. I've given this some thought and have decided to do three posts this week. The first one today will look at short term prospects for the market and the implications of the weekly candle last week coming off the weekly upper band ride that has likely just ended.

The second one tomorrow will look at changes on SPX since this post and the January Barometer with the implications of the red close for January on SPX last week. In brief the historical stats tell us that the chances of a red close in 2020 have increased from the normal 27% or so to about 42%, though I'd note that this still gives the odds of a green close for 2020 at about 58%, so it might be a bit early for bears to be ordering in foie gras and champagne. The stat is actually for a decline from the January close, but as the decline in January was less than 0.2% the effect is much the same.

The third post, currently planned for Friday, will have a look at the numbers for the coronavirus outbreak and attempt to assess the chances of this becoming a serious issue. The numbers are interesting and haven't really had enough attention in my view, and just as something to consider before I publish that post, I'd invite you to keep an eye on the outbreak numbers on the excellent John Hopkins Coronavirus Dashboard which updates a couple of times a day, and bear in mind that the numbers that you are seeing are ten to fourteen days out of date. Why is that? Well that is the incubation period for the virus. Given that the number of confirmed cases has quadrupled in the last seven days that is certainly food for thought, as that means the true figure today may be closer to 400k cases now and might be well over a million cases in another week if the limited efforts to contain the spread of the virus until seven days ago (the start of the incubation period for the confirmed cases we should see in a week) were ineffective. This issue may be just getting started, and it is certainly way too early as yet to dismiss this as the usual news storm that is here today and gone tomorrow.

One other thing to mention is that if you missed our free monthly public Chart Chat at theartofchart.net on Sunday then the recording is posted on our February Free Webinars page, so you can see that there. On to today's post.

I was looking at last week's candle at the weekend and that was a strong weekly candle down from an extended weekly upper band ride. These aren't particularly common so I had a look at what happened after similar candles over the last decade and came up with the following.

After a candle like this there is a 20% chance of a rejection candle the following week that retraces most or all of the previous weekly candle. The candle high last week was under 3300 so it seems so far at least that we are looking at one of these this week, though obviously we won't know until the candle fixes at the close this week. When one of these candles is seen, then half of the time the longer term uptrend is resumed and the other half of the time the shorter term downtrend is resumed, giving an overall 90% chance that the candle close last week was not a low that will hold long.

In terms of downtrend targets 85% + of the time the target within a few weeks will be close to, at, or below the weekly middle band, currently in the 3142 area, and about 70% of the time the target will be close to, at, or below the weekly lower band, currently in the 2907 area. Obviously these are moving targets which are rising, but bottom line is that normally a candle like last week's will deliver a multi-week retracement of decent size, and this is obviously a strong match with the cycle low in April that we've been expecting.

The coronavirus story doesn't look likely to end soon either, so wherever this current move lands more downside seems the most likely option afterwards.

SPX weekly chart:
So where will this current rally land? Well I've mentioned before that something like 70% of significant highs and lows on SPX historically involve some kind of respectively high or low retest, so I always have a lean towards a high forming with a retest that sets up a double top. What are the prospects for that here? Well the larger RSI 14 daily sell signal hasn't reached target, but I noted at the weekend that a shorter term possible daily RSI 5 buy signal was brewing and that has now fixed, so that is favoring more rally and a possible new all time high coming on SPX.

Also favoring that option was the gap up over the daily middle band today, currently at 3282,with that holding all day and a strong close above it at the end of the day. Decent short term resistance at the 50 hour MA was lower and therefore also strongly broken today. I'm not posting the daily 5dma chart here today but the close above the 5dma today, currently at 3266, puts SPX back on my Three Day Rule. If we see a close back below the 5dma (3+ handles below to exclude closes effectively on the support), then we should see a retest of Friday's low soon afterwards.

SPX daily chart:
The shorter term charts favor a retest of the all time high as well in my view. The move down last week broke down from the rising wedge shown below on the 15min chart and retraced just under 50% of that wedge. When a wedge is going to fully retrace then a high retest is ideally seen from this area to set up a double top setting up that full retracement (back to 3070.33 in this instance). Last week's decline was also within a decent quality bull flag falling wedge that broke up today with a target at the all time high retest. My lean is therefore to see that retest, ideally with a subsequent fail at a marginal higher high into the next and larger leg down.

In the short term I have a very interesting rising channel formed from Friday's low, with a 15min RSI 14 sell signal fixed at the close today and a small double top setup looking for the mid 3280s. We may see that target made tomorrow, with a backtest of support at the daily middle band and a hit of that short term rising channel support. If that holds that channel can take us straight up into the all time high retest this week, which would be a very nice setup to trade, so I'm hoping that's the way this plays out. We'll see.

SPX 15min chart:
I'm planning my next post for tomorrow afternoon and by then we should see whether support has been backtested and whether it held. Until then ..... :-)

Wednesday, 22 January 2020

Another Week, Another Inflection Point

Apologies for the lack of a post last week. Some of you know my wife has some health issues at the moment and they have me distracted. I'm doing this post tonight because SPX is at a key inflection point and because the way this breaks may deliver the direction for the rest of January.

Before I start I have a quick announcement.  We (theartofchart.net) have launched a new options service run by an old friend of the site Paul Frey. This is an educational service looking at options trade opportunities in real time run by a thirty year veteran of options trading. If your interested you can read about the service and access the free trial here.

Just to review the overall setup here, we have been looking for a reversal soon on this seemingly endless move up, and as I was noting in my last post, daily RSI 14 and RSI 5 sell signals have fixed on SPX, and a daily RSI 14 sell signal has also fixed on NDX, with a possible RSI 5 sell signal brewing too. These daily SPX RSI 5 / NYMO signals are very reliable so we were actively looking for the high.

SPX daily chart:
But then ....... there was a very interesting setup last week where it seemed that the perfect short term rising wedge from 3214.64 might break up, and I did a webinar that afternoon at that inflection point that I then posted on my twitter.

I was talking in that inflection point about the possibility that the rising wedge on SPX might break up with a target in the 3392 area and was talking about the very reliable performance of these patterns on the lower probability direction break, as long as after that break the broken wedge resistance trendline is respected as support.

Last week's video:
I was saying in that webinar that wedges breaking against direction like this are fairly rare, though some of my longer term readers may recall the big one from the 2009 low that broke up on SPX a few years ago and made target, but on smaller timeframes where patterns form and play out a lot they are more common, and as it happens there was a very good example on the SPX intraday chart today.

This example, on the SPX 1min chart below was a decent quality falling wedge (in the box) that broke up slightly in a bearish overthrow, and then broke down. There was a perfect backtest of broken wedge support and then a move to the pattern target shown with an arrow. This is an ideal example of what I was looking at in the video and a great inverted example of the larger pattern setup on SPX here.

SPX 1min chart from today:
So that brings us to today's inflection point on SPX, shown below on the 5min chart over the last month. The rising wedge broke up, backtested the broken wedge resistance trendline and then continued higher, but returned today to backtest broken wedge resistance again, closing just above it.

If SPX breaks back below that wedge resistance trendline then the 3392 wedge target is invalidated, and at that stage SPX and NDX are still on strong sell signals with a short term pattern outlook which will then be leaning bearish again. If instead ES recovers the ten handles or so lost since the RTH close today, then SPX holds the trendline as support and makes a new all time high, then that 3392 target will be looking pretty good.

We'll see how that goes tomorrow but whichever way that break goes may well deliver the market direction for the rest of January, which is important as the January Barometer statistic I've been looking at actually delivers pretty well. I'll be writing this up in detail in my next post at the weekend but the bottom line is that if January closes green, over the 2019 close at 3230.78, then the odds of SPX closing 2020 higher than that January close are about 87%, up from an average probability of an annual green close of about 73%. If January closes red, under the 2019 close at 3230.78, then the odds of a 2020 close lower than that January close are about 41%, up 50% from an average probability of an annual red close of 27%.

SPX 5min chart:
We'll see how that goes in the morning, though I'll be a bit late in so I'll likely miss the RTH open.

Tuesday, 7 January 2020

There Is No ........ QE4

Boy - 'Do not try to bend the spoon. That's impossible. Instead .... only try to realize the truth.'
Neo - 'What truth?'
Boy - 'There is no spoon'

From The Matrix - 1999. 

One thing that has been strange in the last few months is the virtual media silence about the Fed's increasingly aggressive interventions in the interbank market. This has raised a number of questions. We can assume that there must be some kind of significant issue in the banking system, otherwise the Fed would presumably not be intervening on a scale which seems to be as large or larger than previous periods of official quantitative easing. What that problem is seems unclear, and discussion about it seems to be very muted. That might just be because the financial press are clueless, but it also seems possible that the media are respecting some kind of informal gag order from the Fed, who are also keen that this intervention not be described as QE4. That may be because if this was a QE4 intervention, then they might need to explain clearly the reasons that intervention was needed, and they might be reluctant to explain because it might shake confidence. This is obviously a potential news bomb waiting to happen and is worth bearing in mind until this situation clarifies.

With a free press, which the US rather famously used to have, you'd think that would be a major topic of interest right now, but for some reason it isn't. This doesn't seem to be a big issue yet but may become one at some point if interest grows into why the Fed has deemed it necessary to pump hundreds of billions of dollars into banks and bond markets since (Not) QE4 started on 14th October.

All this being said, this (Not) QE4 needs a shorter working name so for the purpose of further discussion I'm going to shorten that to NQE4.

One question that I've been asked in the last few days is that with the Fed intervening in markets every day to buy bonds, buying about $9 billion worth so far this week, another $10 billion between Thursday and Friday last week, whether it's possible to get any significant decline on equities going. SPX is up slightly under 10% since NQE4 started on 14th October and NQE4 shows no signs of stopping anytime soon, so soon enough this intervention may need to be counted in trillions. Whatever the name used that is a very serious intervention, and judging by the effect of similar looking interventions in QE1 through QE3, are likely to put an overall bid under equity markets while depressing bond prices, and we have been watching bond prices decline over this period as well. The trajectory of this intervention on the Fed balance sheet looks roughly equivalent to QE3 so far, though it is averaging over $100 billion per month so far, with QE3 having averaged slightly about $92 billion per month through 2013.

Why do bond prices decline while the Fed is buying bonds on a large scale? I have a couple of theories but no real knowledge. What I can say is that bond prices have tended to decline during QE periods and rise as they end and for a while after they end. That is what actually happens, why is another matter. I wrote a post about this called 'The Great Brain Robbery' in May 2014 part way through the huge rally in bonds after the end of QE3  That's worth a look if you are interested or just want to read something amusing about the idiotic things that analysts can do when they act as a flock of clueless sheep rather than trained humans with higher than average intelligence.

In terms of the short term though SPX now has a fixed RSI 5 daily sell signal and there were five of these in 2019 , a memorably bullish year, and these all reached target. I've pulled an SPX daily chart from my first post of 2014, just after 2013, another very memorably bullish year with QE3 running through it from start to finish, and you can see here that there were five of these signals in 2013, and they all reached target.

The volume spike that I noted in December is also a significant topping or bottoming indicator. Of the last three volume spikes as large on SPX as that spike in December, the first was the high in October 2018, delivering a 20% decline into December 2018. The next was the spike at that low in December 2018, delivering a bull move of 38% so far, and the third was at an interim high in March 2019, that delivered a 3% decline from high to low. If you look at the 2013 chart you'll see that these volume spikes were also good at picking interim highs and lows then.

In the short term therefore I don't have any real concern about NQE4, as previous QE periods didn't stop similar setups from delivering then. It is a reasonable expectation that at minimum that this signal reaches target and that SPX should drop at least 100 handles or so from this high to the next low.

My concern, if the Fed continues to pour in tens of billions of dollars per week into markets, is that it will be hard to sustain any larger downtrend while that continues. 2013 saw a rise on SPX of 27% or so on QE3, after a 12% rise in 2012. Last year's rise was over 30% but NQE4 may mute any retracement of that move that we see this year. I'm definitely keeping that in mind. A healthy paranoia on the bear side seems advisable. On to the markets. :-)

On the SPX daily chart both RSI 14 and RSI 5 sell signals have fixed and a topping setting is forming here that may take SPX down 100 handles or so into the 3160-70 area. As I've been explaining above, that target looks very credible. It may be that will be all we see for the time being though. We'll see.

SPX daily chart:
On the hourly chart the 60min RSI 14 sell signal hasn't reached target yet and SPX has tested for the third time in three trading days the important short term trend support at the 50 hour MA, currently at 3235. On each of those days the close has been back over the MA. When that changes then the downside opens up.

SPX 60min chart:
In terms of the pattern setup and H&S may well be forming here and on a sustained break below 3215 the H&S target would be in the 3170 area. The H&S is a bit messy and if the 50 hour MA continues to hold as support SPX could still retest the highs. If seen however that should be the second high of a double top and I'd expect any new all time high to be marginal and short lived.

SPX 15min chart:
I was planning to have a look at the January Barometer stat today, but felt it was more topical to look at declines during QE periods instead. I'll be covering the January Barometer next time and (spoiler alert), that stat looks a lot more impressive than the extrapolation from the first five trading days of January that I was assessing in my last post. I'll likely write about that at the weekend.

For this week I should mention that Stan and I are doing two free public webinars. The first, an hour after the close tomorrow (Wednesday) is looking at trading commodities this year using current examples and setups, and the second, an hour after the close on Thursday, is our monthly free webinar looking at FAANG stocks and key sector ETFs. If you are interested in attending either or both you can register for those on our January Free Webinars page.