Gio's Gameplan

By: Gianfranco Carrion

Welcome to the new bear market. Year 2000 was the “Tech Bubble.” The 2008 drop was dubbed the “Financial Crisis.” Will 2015 be coined the “China Slowdown aka Oil is going to $5 a barrel” crisis? I’m sure media will come up with something catchier. Regardless, charts are very ugly very early into 2016

$SPX – Monthly

• On Jan-3 post, I noted “a bear cross of the 10/20 month as the official start of a new bear market, similar to 2000 & 2008”
• As of 1/18/16 … 10mo = 2027 / 20mo = 2020. For all intents and purposes, the bear cross is a reality
• In previous bear markets, price action followed a 3 step process before a major breakdown. 2015 is in step #3
1. Price pierces middle Bollinger (Aug 2015)
2. Bounce back to or near the 20 month moving avg (Oct 2015)
3. Breakdown continues under the 10month moving avg (Jan 2016)

Am I calling for a complete breakdown of the world as we know it? No. Not yet anyhow. I rather let price do the talking.  In 2000 and 2008, the $SPX dropped more than -50%. Zooming into the $SPX weekly chart, we see the current correction (from high to low) hit -12.3% last Friday (1/15).

$SPX – Weekly

• Inverted hammer from last week in 2015 was followed by massive sell-off
• High to low correction from 11/3/15 to 1/15/16 = -12.3%
• Weekly RSI = 35.63. Chart did NOT print a sub 30 RSI during “Oct 2014 Ebola Scare” or “Aug 2015 China Scare”
• $SPX dropped as low as 1858, piercing the Aug 2015 low (1867). Now a mere -3.2% away from Ebola lows
• Price currently at lower weekly bolli at 1879
• You might have heard this - “no such thing as a triple bottom.” $SPX currently holding 3rd test of 1870-80

You’ve heard all the reasons on the selloff already. From Iran vs Saudi war fears, to North Korea bomb tests, to China crashes, one can spend hours debating. But the daily charts say $WTIC (Crude Oil) is clearly calling the shots daily

$NDX – Daily

• 1/6/16: Oil gaps down -3.4% overnight and closes at -5.2%
• In the next 8 sessions, Crude declines -17.4%
• $NDX performance from 1/6 to 1/15 = -8.7% (to the low)
• Daily chart printed sub 30 RSI on Jan 7th and has spent 7 sessions on the bottom Bollinger. There is no “oversold” reading that matters once fear hits the street (at least on a shorter timeframe).

$WTIC – Weekly

• Current oil decline stands at -72% from July 2014 highs – second largest decline since 1999
• Every consolidation period has broken to downside, dragging $SPX with it
• Reversal in oil decline can mark a short term trade-able bottom. Must track oil chart daily

$WTIC – Monthly

• 2000 Bear Market … Oil -56% / $SPX -50%+
• 2008 Bear Market … Oil -78% / $SPX -50%+
• 2015 Bear Market … Oil -72% / $SPX -12%
• If Oil prints $20 = -81% decline (new record)
• Do you think this time is different? Will we make a new record drop? Extreme fear indicates long bias now
• Is the decline in equities near an end? Or just starting? Let’s measure fear next

$NAA50R – Percentage of Nasdaq Stocks Above 50dma

• Jan 2016 = 9.21% (Only 15% above 200dma)
• Aug 2015 China bottom = 9.76%
• Oct 2014 Ebola bottom = 16.21%
• Oct 2011 Europe bottom = 5.5%
• Mar 2009 Financial Crisis bottom = 4.25%

FINAL THOUGHT

With only 9% of Nasdaq stocks above their 50dma, breadth is at historic low levels. For clarification, a reading this low DOES NOT guarantee you are catching a major bottom. Especially given where we are on the $SPX monthly chart. The chart below displays the latter measure during the 2008-09 bottom. After the first 10% on $NAA50R, it took 6 months and a further -22% decline for the bottom to be final.

Is this sell off truly as destructive as 2008 or 2000? I do not think so; however, we won’t know until long after a bottom is formed. Nevertheless, the risk/reward has to favor a short term bounce with a cap at $SPX 1990 (+6%). Focus on $WTIC chart for a possible reversal and squeeze which will trigger large short covering on the indexes. Once Oil loses strength, $SPX trend is strongly biased to downside as long as it remains under 10month moving avg (2027).

Trade = Long $SPX via $UPRO at Tuesday (1/19) close. Stop at $SPX 1,855

Thank you for reading - Gio

$NAA50R – 2008 Financial Crisis Bottom

Thanks for reading!