The Power Of Faith

I have a gap in my work schedule this morning as we wait for the Fed this afternoon, so I thought I'd do a quick update on the inflection point that SPX has reached today, and talk about why the still very pervasive faith in the power of the Fed to keep asset prices up should not just be dismissed as irrational.

For me I look at the Fed and I know that I don't see what most others seem to see, as I see a track record of successively larger failures that have created a Fed seemingly capable of trying anything to try to keep asset prices high, for fear that a serious decline in asset prices might unleash an economic whirlwind that they could not hope to control. They have my sympathy but, based on their track record, not my respect, and here is my image choice for the Fed today. If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas.

That said, the power of Fed may not be impressive, but the power of the strong faith in the power of the Fed might be. I'll explain why that is.

A decade or so ago I was chatting to someone on a blog and that person said to me that the problem they had with gold was that it was only worth what someone would pay for it. I replied that they had come very close to a very important insight about the markets, and the insight was that any tradeable asset was only worth what someone would pay for it and, furthermore, that what they would pay you for it, in currency or assets, was in turn only worth what someone would then pay for that and so on.

In a very real sense therefore, if anything that can be bought or sold is only ever worth what someone would pay for it, and the same applies to anything that they would be using for payment, then any market is a construct of faith, faith that the things bought and sold in the markets have value, and faith that those markets will continue to exist, so that they will continue to have value.

This is the reason that a loss of faith, or confidence, in markets can be so damaging, and why they can tumble so fast in the absence of buyers. Market panics can start recessions, damage economies, make rich people poor and change the fate of nations.

Can faith move mountains? Well a lot of faith can supply enough labor and bulldozers to at least try to move them, and it is well demonstrated that through the placebo effect faith can heal the human body without medicine that would have any scientifically demonstrable effect.

Faith however if fragile. If you don't believe that a placebo medicine might heal you, it won't work, and if people lose faith in the power of the Fed to maintain asset prices, in the absence of anything else to keep them up, then they will fall. So how effective is this faith in the Fed likely to be here?

Well there are obvious limits to the power of faith in markets. I wrote a post on 16th May 2014 called The Great Brain Robbery reflecting (in the second half of the post) on the seemingly universal belief held at the end of 2013 that as QE3 ended, bond prices would fall in response. I had argued the opposite at the time, based on the pattern setup and the bond price history from the ends of QE1 and QE2, but I'm not certain I convinced anyone at the time that bonds might go up. The point was though that they did go up from there in a big rally, and the near universal belief that the opposite would happen didn't have any obvious impact at all.

Fast forward to the present and there is nothing like that general belief that equity markets will go up now. My post yesterday looking at the history of declines like we have seen so far this year over the 91 years of past price history on SPX tells us that there would usually be a backtest like the one we have seen into today, and then that the backtest would usually fail into lower lows. If that sample is restricted to the five examples I chose as directly comparable because they were the instances with serious economic shocks, then they all rallied back to this retracement level, and they all five then failed into lower lows. That's only a statistical sample of five, but that's a very strong indication of what would generally happen here.

It would be tempting here to compare the Fed to the story of King Canute trying and failing to command the tide, but that's not a good comparison as the movement of the tides depend on gravity, something not subject to the influence of any man, and the movement of the markets depends on faith/confidence, which is. We will see how that goes today. On to the markets.

On the monthly chart SPX has returned to backtest the monthly middle band, and is slightly above it at the time of writing. Of the 24 examples I was looking at in my post yesterday, eighteen failed without an obvious monthly close back above the monthly middle band, currently at 2892, and with the end of this month at the close tomorrow. Of the other six examples only two (of 24) managed to deliver a visually obvious monthly close back above the monthly middle band at the first test.

SPX monthly chart:

On the daily chart SPX has reached the 61.8% fib retracement of the decline and a strong daily RSI5/NYMO sell signal has fixed.

SPX daily chart:

On the hourly chart an RSI 14 sell signal is now brewing.

SPX hourly chart:

On the 15min chart the SPX rising wedge I showed in my post yesterday returned to test rising wedge support as I suggested then, and then returned to retest yesterday's high as I suggested then, and is now slightly overthrowing rising wedge resistance, which is something often seen at highs to signal that the high is being made. These wedges can break up, but break down 70% of the time or more.

SPX 15min chart:

This is the obvious candidate high area for this rally, the pattern and RSI signal setup for this rally support reversal here, and SPX past history also supports reversal here, with almost 90% confidence that the ultimate next target for that reversal would be a full reversal of this rally at minimum. We are waiting to see what the Fed have to say today but the odds favor down.

Stan and I will be doing our free monthly Chart Chat at theartofchart.net this coming Sunday 3rd May reviewing progress on SPX and the usual wide range of indices, bonds, currencies metals, energies and other commodities. If you'd like to attend you can register for that on our May Free Webinars page here.    

This has been a very interesting and surprisingly predictable market to trade and we have been delivering a lot of impressive moves for subscribers. If you'd like to see some of this analysis before the market moves, you can get free access to that for a month just by signing up for a 30 day free trial at theartofchart.net on this page here. That gives you access to most of our analysis and particularly our subscriber only twitter feed where we post our intraday updates and targets. The trial is free for 30 days, at the end of which you can either cancel with no obligation or subscribe to one of our services.

An Overflow Of Good Converts To Bad

I have a Shakespeare theme with the title today, which is a quote from Richard III. I am a lifelong Shakespeare lover and have been using some of my quarantine time watching film versions of some of his plays, of which I have about thirty or so in total, many of which were beautifully done. Over the weekend I was watching The Tempest 2011 with Helen Mirren, Macbeth 2015 with Michael Fassbender, and Roman Polanski's Macbeth from 1971, controversially filmed just two years after the Manson Family tragically murdered Polanski's wife Sharon Tate and their unborn child.

All good films, though I do struggle with Shakespeare's great tragedies as I find the main protagonists very unsympathetic. Hamlet is forever looking for excuses not to act, King Lear brings ruin upon himself through his foolish actions at the start of the play but the strangest of all to my eyes is Macbeth.

Why is Macbeth so strange? Well the play starts with the victorious Macbeth being told by the witches that he would soon be the new Thane (Lord) Of Cawdor, which turns out to be true shortly afterwards, and further that he would later become King of Scotland. The mystery for me is that rather than think 'that's awesome' and just wait for that to happen in the normal course of events, Macbeth then murders the King, usurps the throne, and then rules as a tyrant until overthrown and killed not long afterwards by those he injured or mortally offended with his usurpation of the throne and subsequent tyranny. In modern terms one might compare this to him being reliably informed that he would win the lottery, then responding by fixing the lottery, winning it fraudulently, and then being prosecuted and jailed for his crime. Through his impatience he manages to snatch utter defeat from the jaws of otherwise seemingly inevitable victory. Stranger still, most of the many questions posed about Macbeth's motives in the play don't seem to involve asking why he's behaved like such an idiot. Weird.

Before I start I have a couple of things to say, and the first is to apologise for the length of this post. I did think about splitting this into two or three posts but didn't think that was practical. There is just a lot of information in this post. The second thing is that you may get the impression that I have complete contempt for the Fed and that isn't right. The Fed is staffed by highly intelligent and qualified people forced by the weight of past errors and poor leadership to take ever more insane measures to try to keep the economic show on the road. They have my sympathy and it is not a job I envy them. In terms of their predicament I described them a few years ago as being on the road to hell, a road that is wide, slopes downwards, and every so often has a signpost that states 'BECAUSE OF THE ACTIONS THAT YOU HAVE MADE IN THE PAST, YOU HAVE NO CHOICE BUT TO CONTINUE DOWN THIS ROAD'. They are effectively prisoners of circumstance here, with no obvious good options. The title of this post is referring to them, and their position is akin to that of Macbeth after he murders the King of Scotland to usurp his throne. From that point, equivalent here to the Fed allowing the dotcom boom to become a huge bubble, Macbeth's options steadily narrow to force him down the path to ultimate ruin. Looking at Macbeth I think of the Fed.

On to the markets. I'm mainly taking a long term view today as there's not much to add to my last post here, other than that the H&S scenario I was looking at there has evolved into a possible double top scenario instead. I will be looking at the short term setup in the last chart on this post.

I've been reading a lot in recent days about the many reasons that equity markets will break back up over this level, and that, having reached as high as this level (2900 area) on this rally, the benefit of the doubt is with the bulls as they have already come further than they would have done in a bear market.. Nothing could be further from the truth historically, and in this post I'll be showing you why this rally has come right up to the level one would expect it to reach, and show the historical statistics that strongly favor this rally failing in this area.

To do this I have prepared two log scale monthly charts on SPX that run back to when data starts in 1929 through to the present day, and have identified 24 occasions in the lifetime of SPX when after a significant bull run, SPX has broken back clearly below the SPX monthly middle band as we have seen it do this year. I would note that there were two borderline candidates, in early 1939 and early 1940 of which I excluded the 1939 example, which if included would have been a recovery back above the middle band before lower lows, raising the number of these from two to three on that chart, and from three to four overall.

The stats over the lifetime of the SPX for what came after the clear break below the monthly middle band were as follows:

1. Clean backtest of the monthly middle band before lower lows: - 11 examples. 
2. Sloppy backtest of the monthly middle band before lower lows: - 7 examples
3. Recovery back over the middle band before lower lows: - 3 examples
4. Recovery back over the middle band before higher highs (over preceding high) -3 examples

What can we take away from this data? Well the first point is that a backtest of the SPX monthly middle band soon after the clear break below is what you would usually expect to see. That level is at 2889 at the time of writing and the high on SPX so far today was marginally higher at 2921.15. None of those first eighteen clean or sloppy backtests of the monthly middle band delivered an obvious visual close back over the monthly middle band at the end of a monthly candle, so with this month ending at the close on Thursday, the obvious place to see this rally fail would be about here, and the obvious time would be about now. Most of these middle band backtests historically occurred the month after the break down.

So historically you'd expect to see this rally fail about here and about now about 75% of the time, and to result in lower lows before retesting the preceding high about 87.5% of the time. What about the others where the uptrend resumed? Well there were three of course, so about 12.5%, and these were all on the later chart, with the first in 1987, the second in 1994, and the third in 2018/9. Let's look at these.

The 1987 'crash' is being cited as a parallel for the current market decline and the key thing that I would note about that is that the backtest of the daily middle band came after about four months and then lasted a year, with the first significant break back above it at the end of 1988.

The decline in 1994 was a bit marginal and I wondered briefly whether it should be included, but SPX did trade under the monthly middle band for much of the year, even if the initial break below was marginal. After that initial break it was six months before there was a clear break back above the monthly middle band.

The decline and recovery in 2018 was the fastest, with a hard break below the monthly middle band in December 2018, a recovery slightly back above it in January 2019, and then holding as support at the lows in February, May and June 2019 before the last push up into the all time high at 3393.52 on 19th Feb this year.

So what does this data tell us that we should bear in mind here? The key takeaways for me are these:

1. A decline comparable to the one we have seen this year has usually delivered a rally back to the monthly middle band and 75% of those failed there into lower lows. 
2. Only four of these examples broke back above the monthly middle band within three months of the initial break (about 16.67%) and of those four, three failed into lower lows. 
3. Of the three of these examples that resumed the uptrend, two spent at least several months testing the monthly middle band before breaking back up and only one managed higher highs within a year of the initial break down. 

So what would I also look at in this group? Well the economy has suffered a major shock, so I would pick out those comparable examples at the end of a major asset bubble such as 1929 and 2000, or with a major shock to the system, 1940 (WW2), 1972 (oil crisis), 2007 (financial crisis) as the more obviously comparable examples. Just looking at those five what do I see?

1. All five of those delivered backtests of the monthly middle band that failed into lower lows and in all five of those instances the monthly middle band was not broken above on a monthly closing basis until the final low for that move had been made, and was only rarely backtested again on the way to that final low. 
2. Only one of these examples delivered a break back above the monthly middle band within two years of the initial failed backtest and that was after the low in 2009, with that recovery back over the monthly middle band in Q4 2009, from the failed backtest in Q1 2008. 

Though this is a sample of only five previous comparable examples, four of the five delivered fast clean fails at this retest, with only the 1973 backtest being lengthy and involving some intra-month recoveries back over the monthly middle band. All then failed into new lows, with no retest of this area for years afterwards, as even after the 2009 low it was 2012 before the backtest and fail area from 2008 was retested. 

Here are those charts for everyone to look at and while some details might be arguable, I don't think that there's much overall room for reasonable dispute with my main conclusions, though I will be looking at what obviously is different this time in the next section. 

SPX monthly log scale chart 1925-75: 

SPX monthly log scale 1974-present: 

So what is different this time? Well firstly the Fed is dramatically different this time, and that's what I'll be looking at next. 

Here is my image choice for my look at the Fed today, and if you're wondering why I chose it, just read on. If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas. 

Historically the role of the central banker was always pretty clear. Ben Franklin, in another context once said that 'an ounce of prevention is worth a pound of cure', and the key role of the central banker historically was to deliver that ounce of prevention. A good central banker tried to smooth the economic cycles, adding some liquidity when growth was sluggish and taking some away when growth started running away. The classic descriptions for me of the job of the central banker by a central banker are from William McChesney Martin (Fed Chair 1951-70) and they described the model central bank aiming to 'lean against the wind' or 'take away the punchbowl just as the party starts to really get going'. The job was about keeping economies on an even keel, managing them through financial panics, and ignoring short-termist politicians, which is why over time central bankers in major economies were made independent of politicians so that they could do their boring but important work with longer time horizons than those allowed by elections.

So what happened to the Fed? Well Greenspan set the ball rolling with a mix of awe-inspiringly bad forecasting skills, arrogant hubris, and a need to be loved, when he let the dotcom bubble happen, as bubbles are fun and party poopers are rarely popular. If you think I'm being harsh about his forecasting skills dig up a transcript of his confirmation hearing from 1987 and his hilarious grilling by Senator Proxmire then, after which Proxmire concluded that he (Proxmire) could at least take some comfort in the thought that Greenspan's past forecasting record was so bad that it was hard to imagine him doing any worse in the future. In the Dotcom Bubble Greenspan ascribed much of the bubble to improvements in productivity and kept cutting interest rates until shortly before the bubble burst. Those productivity gains turned out to be largely illusory but the bubble's aftermath was not.

After the dotcom bubble burst, undeterred by previous incompetent failure, Greenspan's Fed applied a pound of cure to try to fix the aftermath, cutting interest rates hard and letting a property bubble form that then exploded in 2008.  By this point Bernanke was Fed Chairman and was initially cautious in response until the failure of Lehman Brothers, at which point it seemed that the entire banking system was at risk of failure. The next pound of cure applied in the wake of that failure has defined the Fed that we have inherited today.

The Fed we have now is unlike any that we have seen historically. Prevention and caution are things of the past, leaning against the wind is a memory and, far from taking away the punchbowl just as the party is getting going, the Fed is forever now adding more punch in the fear that if the party should ever stop, then the aftermath could be so bad that the pound of cure required to fix it might be beyond their power to deliver. The Fed has promised to do whatever it takes to fix this crisis and has already committed many trillions of newly created money to doing so. This is new, and not comparable to anything that any previous central bank has tried to do in any previous crisis. Does this look crazy and desperate by historical standards? Yes. Is there a reason for that? Yes, and that brings me to the second main thing that is very different going into the current crisis. Debt.

The chart above is a couple of years old and debt is a huge worldwide issue much larger than the issue in the US, but the chart above is a representation of the growth of public and private debt in the US over recent decades. Note that the doveish Greenspan replaced the hawkish Volcker as Fed Chairman early on in 1987, and note the small pause in the increase in private debt during the financial crisis 2008/9. The Fed has been trying to keep the economy on the road for decades now with ever lower interest rates and easier money, and during that time, and in response to these conditions, public and private debt has been growing ever higher to levels that really have no historical precedent.

Historically increasing levels of debt tend to depress growth and increase inequality, and obviously we've been seeing that deliver in recent decades, and of course there is also an obligation for that debt to be serviced and, in theory ultimately, to be repaid. What happens in the event that a highly leveraged economy receives an economic shock that makes it hard to service that debt? Well the expectation would be that a significant amount of that debt could not be serviced or repaid, and worst case much of that debt might default. Given the huge level of this debt and the way it is layered through the economy and the financial system, that could precipitate an economic crisis on a scale that might risk a second Great Depression which is an outcome, more than anything else, it is the Fed's highest economic priority to prevent.

Overall the Fed has been lurching from crisis to crisis for decades now, their original brief as economic watchdog is long forgotten and their time seems mainly to be split between adding floors to a skyscraper of debt in the world economy, and trying to catch the chunks of debris falling from that unstable edifice that gets ever less stable the higher it climbs. The Fed looks ready to take any measures, however deranged, to try to prop everything up into an approximation of economic health in the hope that if they can do so for long enough, something will turn up that makes everything turn out ok. Who knows? That might even happen.

Right here and now though what's the bottom line? Historically the odds of a failure here on SPX into lower lows are very high, and the chances that whatever happens here will deliver new bear market lows before a retest of the all time high on SPX are close to 90%. Short term that failure would usually happen about here, and about now.

Against that weight of historical precedent stands the Fed, in a stance and wielding historical weapons that are without historical precedent, and ready to act in a way that most past Fed chairman, possibly including even Alan Greenspan, would view as wildly reckless. Can they prop up the markets a bit longer? Maybe. We'll have to see.

Regardless though, a direct resumption of the uptrend coming into 2020 looks both hard to deliver and unlikely to last long, but if SPX should close April much over 2900 on Thursday, that would open a possible higher range 2900-3100 over coming months until the next leg down would then most likely start anyway in the summer. We will see how this develops, and of course nothing is ever certain until it has happened.

Back to the short term, where the SPX high this morning has finally established a really good resistance trendline, and this is now a very good candidate for the rally rising wedge. Ideally SPX would next retest or modestly break rising wedge support, currently in the 2840-5 area, then retest the rally highs tomorrow into FOMC and make a marginal higher high that respected the 61.8% retracement area 2930-5, then fail to start the next leg down for this bear market. I'd also like to see rally high retests on NQ and ESTX50 to complete an ideal overall topping setup.

SPX 15min chart:

I don't know yet whether Stan and I will be doing our free monthly Chart Chat at theartofchart.net this coming Sunday or the following one. Whenever we are doing that, we'll be reviewing progress on SPX and the usual wide range of indices, bonds, currencies metals, energies and other commodities. I'll be tweeting out more details on my twitter as I get them. I'm hoping to get another (much shorter) post out this week on Thursday or Friday looking at the action on SPX between now and then.

UPDATE: The next free public Chart Chat at theartofchart.net is on Sunday 3rd May and you can register for that on our May Free Webinars page here. 

Oil And The Old Chinese Curse

My last few posts have been a coronavirus COVID-19 series, so I'm putting in the links here so as to refer back to them easily for now. These are the twelve posts so far. I'm planning to finish this series with a post on the likely economic impact of COVID-19 over the coming year, and a look at the interesting search for scapegoats that is now getting started, with the obvious targets being the very strange behaviour of both China and the WHO as this crisis was developing. That should conclude this series in the next week or two, though economies and markets will likely take quite a while longer to get back to anything that we might recognise as normal.

18th February - Peering Through The Fog Around Coronavirus COVID-19
24th February - Some Genuine Coronavirus Numbers Coming Through
28th February - Falling Down The Steps
9th March - A Tale Of Two Cities
12th March - Sudden Death
16th March - Pinball Markets
20th March - A Short History of Superflu Pandemics
24th March - A Short History Of Market Crashes
31st March - The Ghost Of 1987
8th April - The Second Mouse
14th April - Silent Spring
17th April - Rally Bear Flag Setup Much Improved

The most famous old chinese curse was 'may you live in interesting times', with the kicker being that interesting times tend to be scary, and the current times we are living in are certainly both interesting and scary, with some of the most interesting and scary action this week on oil.

I mentioned in my post on Tuesday 14th April that there was a gathering crisis on oil due to the supply and demand imbalance there, and suggested that not being long oil might be a good idea for the time being. What was that gathering crisis that I was warning about? Well really it's straight out of Economics 101. This coronavirus crisis has cut the world demand for oil by about 35 million barrels per day with demand for fuel for cars and aircraft in particular shrinking almost to zero during this quarantine. This crisis also started just after a price war on oil started, with oil supply driven deliberately higher in an effort to drive some higher cost oil producers out of the market (particularly US shale oil producers I think), which was obviously poor timing.

Since the quarantine started there has been some action to reduce oil supply with OPEC leaders agreeing to reduce supply by ten million barrels per day a couple of weeks ago, but that still leaves a large excess of oil being produced every day relative to weakened demand, and that oil has needed to go somewhere. There is a lot of available storage capacity and that has been filling up over this period so far, and is close to being full. That causes an obvious problem where oil production is at some 20 million plus barrels per day more than current demand can absorb. So what does Economics 101 tell us to expect to see to correct this imbalance, which cannot continue long?

Well at this point you would expect price to fall to establish the market clearing price, and the market clearing price of course is where price falls to a level at which demand has risen in response to the price decline (looking hard at the moment, though I might fill up my car a bit sooner than otherwise), and enough supply comes out of the market with production shutting down at higher cost producers to the level where supply matches demand. I've been warning subscribers (at theartofchart.net) and others in webinars for a couple of weeks that this was likely coming and might be a violent process, and my expectations were met and exceeded by the violent moves that we have watched on oil this week.

So what did happen on oil futures on Monday? Many news providers were reporting that oil producers were paying buyers to take their oil, and that oil prices had dropped below zero. Was that true? No and no, though that may have appeared to be the case to the uninformed eye. What actually happened was this.

The trading instrument that everyone was watching on Monday was the CL May futures contract, which was expiring yesterday on Tuesday April 21st and committed whoever held that contract to take delivery of this oil within a short period after that contract expires, usually within a few days. That oil would not actually be delivered in barrels but would come from a pipeline, or sea or road tanker. The term barrel here is just a unit of measurement, but in terms of a future, it is not that final holder of the contract that pays the producer for that oil. That oil was paid for when that futures contract was created, and at that point, perhaps in January 2020 or earlier, the producer was paid for the oil, at the market price at that time, and the futures contract committed them to deliver that oil shortly after the contract expired yesterday. That futures contract was then sold into the futures market and may have changed hand numerous times since, bought and sold by oil users, institutions and speculators of various types with a lot of those contracts being held by ETFs aiming to mirror changes in the price of oil for their investors in various stock markets, or oil processors such as refineries who would take the oil to process that into secondary products such as gasoline, or owners of oil storage facilities wanting to increase their oil stocks. The holders of those futures on Monday, unless they were producers buying back contracts to cancel their agreed deliveries, and turning a handsome profit on the original sale prices in the process, were all therefore oil processors, storage facilities, institutions and speculators. What happened to these contract holders on Monday?

Well as I mentioned, oil storage capacity is almost full, so not much will have been wanted for this. Oil processors have demand issues, so are operating at relatively low levels. After the contract expiry on Tuesday there would be a lot of oil that would have to be delivered somewhere, and the owners of those contracts at expiry would have committed to takethose deliveries. Of course financial institutions and oil investors/speculators do not tend to have any storage facilities, so all of these would have to be out of this contract before expiry. Demand is weak among those who would normally be buying these from them and so, Economics 101 again, on Monday afternoon the market had to find a market clearing price at which those who could take delivery of that oil would buy those futures from those who could not take delivery of that oil, and at the market close on Monday, that market clearing price closed at an eye-watering minus $37.66 per barrel of oil.

What who got caught on the wrong side of this price discovery massacre? Not the oil producers, who if they had forward sold that oil to create the CL May futures contract in (say) early January would have received a healthy $65 per barrel or so at the time. The main victims were oil ETFs, who tend to hold a proportion of their oil futures contracts in the front month until very shortly before expiry, with USO declaring an event loss of $80 million from this on Tuesday. Also caught were individual or corporate speculators. Some of those losses will have wiped out accounts and may not be recoverable from the account holders and so Interactive Brokers, one of the most solid and reputable of the brokers, have already made provision for a possible $80m of losses due to this since then. Many other brokers have not yet been so forthcoming, and I understand that there are $500m or more in brokerage losses that have yet to be admitted to. Hopefully these aren't on a scale that will wipe any of them out.

So what's the takeaway here? Well it's worth remembering basic economic rules, even when watching the Fed at work might leave the impression that these don't matter any longer, and with the excitement having now spilled over into the CL June contract, which fell from over $20 on Monday night to a low in the $6.50 area yesterday afternoon, there is also the prospect that, once supply has actually fallen to meet demand, that we might see a historic low on oil. As it happens the low yesterday on the main oil index $WTIC established a very nice looking possible support trendline on a falling megaphone from the 2018 highs and given that the price of actual oil is unlikely to fall below zero, that might well mean that oil is now in a bottoming process.

WTIC daily chart:

Is it likely that a trendline can really mean that much? Well the chart below is my WTIC monthly chart from 14th Feb 2016 calling a possible low then at a huge falling wedge support trendline and that held until this year. In fact the move we are seeing now may well be a bullish underthrow of that wedge support after WTIC rallied to hit wedge resistance in 2018. Any remaining doubters might want to check out my post here from 25th June 2010 calling for a low on BP at a similar trendline, and note that BP, expected by many to go to zero in the turmoil of the Deepwater Horizon oil spill, both then made the low at that trendline and, as I further suggested in the notes on that first chart, closed June back over $28. This kind of thing happens a lot.

WTIC monthly chart from 14th Feb 2016:

Here is my image choice for this very foreseeable oil price crunch, though I do really feel for any individual investors who saw oil hit zero on Monday afternoon and went long in the expectation that it had to go up from there. That's hard, but the markets can be very harsh towards the unwary. If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas. On to the equity markets:

In my last post I was looking at the overall bear flag setup for this rally, and saying it was looking pretty good. With nothing obvious holding markets from new crisis low apart from faith in the unlimited (printing) power of the Fed I was looking for a likely turn and so far, that is what we have seen this week. The possible daily RSI 5 sell signals that I mentioned were brewing on SPX, ES, NDX and Dow have now all fixed and I'm expecting these to make target, so I'm expecting equity indices to be heading lower soon.

SPX daily chart:

Before the open yesterday morning I was talking about the possibility that ES might make a low yesterday at a possible H&S neckline and then rally to make the ideal high on an H&S right shoulder that would have an ideal high in the weekly pivot area at 2822. It doesn't need to get that high but that would be a very obvious target.

ES Jun 60min chart:

That H&S scenario is fully mirrored on SPX and if that forms and delivers the H&S target that would be close to a 50% retracement of this rally, which would be an obvious inflection point area to reverse there or continue lower.

SPX 15min chart:

We'll see how this goes, and on a break and conversion of 2822 ES to support we could still see a high retest to make a likely second high of a double top, but so far at least this H&S scenario is developing perfectly, and my working assumption is that continues to be the case. If so, SPX would ideally go a little higher into weekly pivot, but in practical terms having just tested 2808 SPX at the time of writing, could turn to start the next leg down at any time.

Stan and I are doing our monthly free public Big 5 and Sectors webinar tomorrow (Thursday) after the close looking at AAPL, AMZN, FB, GOOG, NFLX, TSLA, IBB, IYR, XLE, XLF, XLK and XRT. If you'd like to attend then you can register for that on our April Free Webinars page.

Rally Bear Flag Setup Much Improved

My last few posts have been a coronavirus COVID-19 series, so I'm putting in the links here so as to refer back to them easily for now. These are the eleven posts so far. I'm planning to finish this series with a post on the likely economic impact of COVID-19 over the coming year, and a look at the interesting search for scapegoats that is now getting started, with the obvious targets being the very strange behaviour of both China and the WHO as this crisis was developing. That should conclude this series in the next week or two, though economies and markets will likely take quite a while longer to get back to anything that we might recognise as normal.

18th February - Peering Through The Fog Around Coronavirus COVID-19
24th February - Some Genuine Coronavirus Numbers Coming Through
28th February - Falling Down The Steps
9th March - A Tale Of Two Cities
12th March - Sudden Death
16th March - Pinball Markets
20th March - A Short History of Superflu Pandemics
24th March - A Short History Of Market Crashes
31st March - The Ghost Of 1987
8th April - The Second Mouse
14th April - Silent Spring

This has been a bit of strange week, but prices often hold up into OPEX and they've done that this week, even if the news last night that spiked the market up into new rally highs was not really much news at all. I'll have a quick look at that in two parts.

The Gilead news - This was old news. Gilead do have a promising drug, and that may well help a lot with more severe COVID-19 cases, and that may be achievable in months rather than years, but we knew all that three weeks ago. The Plasma treatment wasn't mentioned in the 'news' last night but also may help a lot, as that leads us into the other news.

President Trump also announced plans last night to start reopening parts of the economy within a few weeks, and that the virus peak is likely behind us. No disagreement there and actually I think he is absolutely right to be looking at reopening the economy. I've mentioned the potentially catastrophic economic damage that could result from an extended shutdown, and that damage is potentially so bad that accepting a large amount of extra deaths might well be an acceptable cost to avoid something even worse. The second point I'd make is that while I agree that the initial virus peak is likely in the rearview mirror for now, that these superflu pandemics tend to come in waves, and this was just the first wave. We must all hope that there is some major advance on treatment the seriously ill before we see wave two within a few months.

Bottom line here is the crisis is not over by any means at all. The worst in terms of deaths and economic damage could be behind us, but that depends on getting a lot of good news over the next few weeks, and we may or may not see that. Lastly the economic damage done so far is severe, and the consequences will be with us for some time to come, even if the news from here is so good that the rest of the pandemic just melts away like dew on a summer morning. Business as usual is absolutely not just around the next corner. Does that mean that the crash lows have to be retested? No, but at the least much of this rally will likely need to be retraced soon.

If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas. On to the markets:

I was saying on Monday that I wasn't particularly happy with the quality of the bear flag patterns from the low in terms of that area being a final rally high area and the good news (for bears) is that position has improved considerably over the course of this week. Right now is very much a candidate rally high area and the rally high may now be in, barring a possible high retest as part of topping process. So how has this setup improved?

Yesterday morning in my premarket video for subscribers at theartofchart.net I was talking about the decent looking setup from there, close to the current retracement lows, into a retest of the rally highs. There were 60min buy signals fixed on ES, RTY, DAX & ESTX50, all of which have now made target, but the main thing I was looking at was the high quality rising wedge setup on the NQ chart. What drew my eye particularly there was NQ's retracement to, and perfect reversal at, the rising wedge support from the early April low. I said that unless that wedge support broke then the obvious next target within the wedge would be wedge resistance, which then was hit and slightly overthrown at the highs last night. At that point of course the next obvious move would be a reversal back to wedge support, hit this morning, which you would expect to break after the bearish overthrow, and that has broken down slightly this morning. The next obvious move in the sequence is to form a reversal pattern, which can include a high retest, and then down.

NQ Jun 60min chart:


On the NDX chart the high this morning confirmed a now decent quality overall bear flag wedge resistance trendline and this is now a high quality setup, with hourly RSI 14 and daily RSI sell signals now brewing on the NDX on the higher timeframes.

NDX 15min chart:

On Dow there is a decent looking rising wedge already and the high retest this morning has set up a decent looking small double top. An hourly RSI 14 sell signal has already fixed and a daily RSI 5 sell signal is now also brewing. INDU 15min chart: 

On SPX the bear flag wedge setup is still only ok, but the high retest this morning has set up a decent little double top, an hourly RSI 14 sell signal has fixed and again, a daily RSI 5 sell signal is now also brewing. SPX 15min chart:

Overall this is now a much improved setup for a rally high and we may well see that here. Pattern setups have improved and there is now hourly and daily negative divergence across the board. Do the globex highs need to be retested? Well I'd like it if they were retested, but though I've heard many say over the years that they are always retested, I have seen for myself that that isn't the case, and a classic example of that was the 'Trump Dump', when ES dropped 5% on the news that Donald Trump had been elected President in Nov 2016. That spike low at 2027 has still not yet been retested, though that may change this year of course. Smaller examples of this happen a lot, though certainly globex highs and lows are retested shortly afterwards more often than not. With last night's Gilead news being effectively old and rather less cheery news, that high might hold for now.

This is now a high quality rally high setup that may well deliver. We will see. There's nothing in the news to suggest a moonshot on equities is likely here and, really there's nothing to be bullish about apart from the vast quantities of money being printed and injected by the Fed to prop up asset prices. That didn't have much obvious impact before the lows in 2009, so there's not much reason to think it will have more impact here.

We did the introduction sessions for one of our regular Traders Boot Camp courses this week. This is a one month trading course taught by Stan and I teaching technical analysis and trading skills. This is mainly aimed at existing subscribers to help them use the forecasts we supply them with profitably, but is also open to non-subscribers. As far as I am aware this is cheaper than any equivalent courses available and, I suspect, much more comprehensive and better value. These were the risk management webinars this week and these were recorded as all the webinars are. Next week we are doing three webinars on technical analysis with Stan and I teaching charting and analysis techniques and it is not too late to join yet, so if you are at a loose end during this quarantine and would like to improve your trading and charting skills then you can check that out on the course page here.After next week we are doing a week each on swing trading and then day trading, for which we also have a lot of very interesting and useful custom tools.

Silent Spring

My last few posts have been a coronavirus COVID-19 series, so I'm putting in the links here so as to refer back to them easily for now. These are the ten posts so far. I'm planning to finish this series with a post on the likely economic impact of COVID-19 over the coming year, and a look at the interesting search for scapegoats that is now getting started, with the obvious targets being the very strange behaviour of both China and the WHO as this crisis was developing. That should conclude this series in the next week or two, though economies and markets will likely take quite a while longer to get back to anything that we might recognise as normal.

18th February - Peering Through The Fog Around Coronavirus COVID-19
24th February - Some Genuine Coronavirus Numbers Coming Through
28th February - Falling Down The Steps
9th March - A Tale Of Two Cities
12th March - Sudden Death
16th March - Pinball Markets
20th March - A Short History of Superflu Pandemics
24th March - A Short History Of Market Crashes
31st March - The Ghost Of 1987
8th March - The Second Mouse

In my last post I was talking about false spring and the almost annual death of the early daffodils near my house as they came out prematurely before the last frosts of the winter. That's been coming to mind this week as people have started to look forward to everything getting back to normal, and asking about V shaped recoveries in stock markets etc etc. It's nice to hear people feeling more optimistic, but while people often talk about the power of positive thinking, it's rare to hear much said about the power of wishful thinking, and at best, it's going to take a while for things to recover.

There are many reasons for this. The first one is that this unprecedented global shutdown has triggered a highly likely global recession which the IMF have now assessed to be as bad or worse than the financial crisis recession of 2009, you can read about that here. That may well be leaning on the optimistic side depending on how the crisis plays out from here. Flattening the infection curve is working ok so far, but that's really just a way of managing the impact on health systems to avoid overload. Previous comparable pandemics infected 40% to 50% of the world population before they were done, and the death rate from COVID-19 seems to be shaking down as being somewhere in the 1.5% to 5% area, depending on the estimate of those infected that show no symptoms (asymptomatic). If health systems get overloaded then that death rate goes up a lot. The virus is likely to go through the population in two or three waves and sooner or later most may have been infected. To make things worse, the normal immunity that a previous infection gives you may be absent here. There have been quite a number of cases worldwide of people recovering from COVID-19 and then being re-infected (and dying) later. That has the potential to make the progression of the virus through the world populations more uncertain and damaging.

How long can current quarantines and social isolations be maintained? Well not that long before severe and lasting economic damage is done. Apart from the damage to business and personal finances, the global supply chain of food is under some threat, and I understand that at least part of the current collapse in the futures prices of cattle and pork is that a lot of processing plants have been closing down after virus outbreaks, and farmers can't sell their stocks. I've read a lot in the past about the amazing ingenuity of the systems in place worldwide to grow and rear, process and deliver sufficient food to feed the huge number of humans on earth and any serious disruption to those systems could mean famine for some, or indeed many. Some countries are already trying to limit food exports to anticipate this problem, which could cause major secondary disruption to the very globalized food supply chains.

There are a lot of smaller crises brewing of course. One that I'm watching with interest is the (next) gathering crisis on oil. There is currently a massive imbalance of about 35 million barrels per day between oil supply and demand. That is an oversupply relative to demand of about 50%. If you're wondering why that is might I ask when you last filled up your car, or took a plane anywhere? OPEC has just agreed to cut supply by about 10 million barrels a day but it doesn't take a stable genius to see that leaves an oversupply of about 25 million barrels per day. Global storage capacity is close to full and unless that imbalance reduces rapidly in the near future there will be (from Economics 101) a potentially very brutal discovery of a market clearing price at which those numbers are brought to balance. That could drive oil prices down a lot further than anything that the Saudis had in mind when they started a price war, possibly down to $15, maybe $10 or even possibly (and briefly) $5 per barrel. That would be a historic buying opportunity but might just crush an important sector of global stock markets. We'll see how that develops over coming weeks but I'd suggest at least not being swing long on oil here.

This crisis isn't likely to be ending here, it's likely just getting started, and if SPX does manage to retest the bull market high, I'll be thinking that might be the second high on a huge double top, but I strongly suspect that we won't be seeing that retest this year. In the event that we do see it, that would be both a testament to the more impressive than expected power of the Fed, and a very strong sell.

Meanwhile, returning to planet earth, on to the markets.

On the daily chart SPX reached the 50% retracement target and has gone somewhat beyond. That may be opening up the 61.8% retracement level in the 2935 area as a target, but if we are going to see this rally extend that far, then we will likely see a decent retracement before that happens. On the daily chart SPX is now retesting an important broken support level at the H&S neckline for the main move down.

SPX daily chart:

On the hourly chart an RSI 14 sell signal has now fixed, and I'm watching the 50 hour MA, now in the 2650 area for support.

SPX 60min chart:

Is the rally high being made here. Well I like the negative divergence, with good quality RSI 14 sell signals brewing on the 15min & 5min charts, and one already fixed on the hourly chart. My problem here is that if this is a bear flag forming from the low, then there is currently no high quality flag pattern established on SPX. By way of example, here is a lovely example on the SPX 1min chart from today of a bull flag that formed after the morning high and then broke up into the higher high later on. These kinds of high quality flag form all the time on SPX on every timeframe.

SPX 1min:

So what are we looking at on SPX here? Nothing yet as high quality as that. This would normally be of high quality at the top of a rally, though not always. What are the obvious options to improve that pattern from here? Well SPX could go higher of course, and I've sketched in a couple of decent options if SPX does that. Another option is to break the current rally support and perhaps establish a channel support trendline parallel to a current resistance trendline with only two touches. If we are going to see that second kind of deeper retracement, there's a decent setup here to do that directly from here. We'll know soon if 2850 area resistance on SPX will hold for now. Even if it does this may not be the end of the rally but it might be the beginning of the end of this rally.

SPX 15min chart:

Is this just a rally on SPX and other indices? Very likely yes. I like to keep an open mind and dislike making definite statements about market direction. Forecasting market direction is about mathematical progressions rather than actually seeing into the future. The economic and market math clearly favor this being a rally. Anyone who can actually see into the future has me, and any other analyst, at a disadvantage, but the problem with prophets is that they are generally liars or fools, or both. We'll see. There's only ever one way to find out for sure on market direction, and that is to wait and see. In the interim I have a great image from despair.com for those who believe that the while the crisis may not have been prevented by the ignorance and mindless optimism that defined policy towards COVID-19 until mid-March, that it may be enough to make the crisis go away now:

We did the introduction session for one of our regular Traders Boot Camp courses on Monday. This is a one month trading course taught by Stan and I teaching technical analysis and trading skills. This is mainly aimed at existing subscribers to help them use the forecasts we supply them with profitably but is also open to non-subscribers. As far as I am aware this is cheaper than any equivalent courses available and, I suspect, much more comprehensive and better value. It is not too late to join yet, as all sessions are recorded, so if you are at a loose end during this quarantine and would like to improve your trading skills then you can check that out on the course page here.

The Second Mouse

My last few posts have been a coronavirus COVID-19 series, so I'm putting in the links here so as to refer back to them easily for now. These are the nine posts so far.

18th February - Peering Through The Fog Around Coronavirus COVID-19
24th February - Some Genuine Coronavirus Numbers Coming Through
28th February - Falling Down The Steps
9th March - A Tale Of Two Cities
12th March - Sudden Death
16th March - Pinball Markets
20th March - A Short History of Superflu Pandemics
24th March - A Short History Of Market Crashes
31st March - The Ghost Of 1987

Almost every spring I see a little drama play out in the flowers near the front of my house. In March sometime for a couple of days, or a week, there is the first serious breath of spring, and the weather is nice enough to lure out humans and the first spring  daffodils. Shortly after this there is a cold snap with frosts and all those early daffodils die, illustrating an important lesson about why being early is not always a good thing. The early bird may get the worm, but obviously that early worm has little to celebrate in this scenario. For the obvious reasons it is also generally the second mouse that gets the cheese.

Why do I mention this? Well that would be because the equities rally is getting another leg higher, and I have seen quite a number of market pundits confidently announcing that the 2020 low is in, and I frankly doubt that. The first leg down is finished for sure, but there is not much to say that lower lows are not coming, and every reason to think that they are. 

In terms of why that is I was explaining in my last post the reasons why I thought then and now that any comparison between now and 1987 is weak as the circumstances are very different. The other thing is that, in terms of where economies are now, the bad news is likely to only just be getting started. Markets have shrugged off some seriously bad news in the last week, but that is likely to just be the tip of an impressively large iceberg of grim news, with the US, the engine of the world economy, going into this crisis less prepared and ready than almost any other developed world economy, and likely to suffer worse than most. 

Just for an aside on that subject, I've created an interesting graphic below showing some of the inventive ways that americans have been responding to the shortage of masks when they need to go out at the moment. My personal favorite is the comedy traditionalist paper bag but other images show masks made from empty water tubs, a sneaker, half of a brassiere, a (clean) diaper, a washing up sponge/scour, a takeaway food cone and a plastic bag. Americans remain inventive, which is just as well, given the initial fail on the part of the US government to respond to this threat in a timely fashion.

What is the bad news that hasn't really hit yet? Well the world economy is essentially paused right now and that's not going to be ending soon. The world is likely in deep recession right now, though we need to see two quarters of data to confirm that. In the US and elsewhere a lot of otherwise viable businesses will likely go out of business permanently, exacerbating the employment data that even without that will likely get a lot worse from here, a lot of otherwise solvent people may be ending up on the street, and a lot of people are likely to die. In these terms this crisis is still getting started, and stock markets are likely to be weak as a result for months or even years to come as a result. It is way too early to be thinking that equity bulls are back in the saddle. 

On to the markets. 

On the daily chart the initial resistance on this rally was the daily middle band, until SPX gapped hard over it on Monday morning. That is now key support, currently at 2517, with the monthly pivot at 2637 as initial support, with the overnight retracements on ES,YM, DAX & ESTX50 all backtesting and holding their monthly pivots on Monday and Tuesday nights. The obvious next target is the 50% retracement of the rally in the 2790 area: 

SPX daily chart:

On the hourly chart the RSI 14 buy signal reached target and that means that SPX would likely need at least one more high to set up negative divergence before this rally is concluded. In the absence of evidence to the contrary I'm assuming that SPX will make that higher high, with an ideal target in that 50% retracement area. 

SPX 60min chart:

The shorter term chart is interesting here, as there is a valid IHS setup on SPX that broke up yesterday with a target in the 3110 area. I'd be very surprised to see that target reached, but this does set up up something that I would call a Janus Flag, and that is when a reversal pattern forms and breaks up (or down) and then rejects into the previous low (or high). If that is what we are looking at here then a rejection lower should deliver new lows for 2020, which is what I think should reasonably be expected as and when. That rejection may not happen until after the Easter weekend though, as holiday tapes do tend to favor the bulls. 

SPX 15min chart:

We held our monthly free public chart chat on Sunday and if you missed that you can see the recording on our April Free Webinars page. Among many other things we were talking in that webinar about the possibility that this rally would extend higher into the target area near the 50% retracement target on SPX. We are also starting one of our regular Traders Boot Camp courses on Monday. This is a one month trading course taught by Stan and I teaching technical analysis and trading skills. This is mainly aimed at existing subscribers to help them use the forecasts we supply them with profitably but is also open to non-subscribers. As far as I am aware this is cheaper than any equivalent courses available and, I suspect, much more comprehensive and better value. If you are at a loose end during this quarantine and would like to improve your trading skills then you can check that out on the course page here.

I'm planning a weekend post looking back at the growth of this COVID-19 crisis, the lessons learned, and what's likely to be next, including the investigation into who, if anyone, is to blame for this crisis developing from a local chinese epidemic into a full blown worldwide pandemic. President Trump made a start on that yesterday raising serious questions about the words and actions of China and the WHO in January and February, which looked strange at the time, and look even stranger in retrospect. The answers should come over the next few months and should be interesting. Everyone have a great holiday :-)