Gio's Gameplan: Bear Market Bounce

By: Gianfranco Carrion

Are the “markets still in turmoil”? Yes. The $SPX remains in a downtrend until proven otherwise. However, two factors generated the much expected bounce in equites. First, as discussed last week, breadth ($NAA50R) reached historically oversold readings. Second, and most important, Crude Oil bounced, which nowadays means a world-wide market rebound. Simple story. Going forward, look for follow thru in the commodity bounce and/or a decoupling of equities and crude oil (ex. $SPX goes higher regardless of Oil).

$USO – Daily

• Always chart $WTIC weekly for most accuracy. However, I like charting $USO daily as it shows gaps
• Jan 20: $USO gaps down -1.8% and goes as low as -6.7% before printing a hammer doji (-2.9%). This was the first sign of a possible upside reversal
• Jan 21: $USO gaps down again -1.7%; however, it reverses to close green +3.8%. Second BIG sign of reversal
• Jan 22: Crude oil closes +17% off the low

If you were focused on headlines on January 20th, you would have been distracted away from the hammer doji. Instead, you would have been focused on the fact that oil “crashed”, the “supply glut” and an “oversupplied market.” All of the latter are true; however, they have been true for 1.5yrs. On January 20th, all that mattered was the price reversal that displayed the possibility of higher prices (hammer doji)

$NAA50R – Daily

• Second flag that called for a market bounce was breadth readings that reached historic lows
• Jan 20: Only 8.6% of Nasdaq stocks are over their 50dmas (14.8% over 200dma). Historically oversold

$SPX – Daily

• Jan 20-22: $SPX bounces +5% from the low (1812) to closer over 5ema (1889)
• 5ema now becomes our rising stop. If long $SPY or other stocks, this is your line in the sand
• Resistance is at 20dma (1966, +3%) or previous consolidation area from Sep 2014 at 1990 (+4.4%)

$SPX – Weekly

• Weekly candle also printed a hammer doji on the lower bolli. Long hammers often mark price reversals to the upside
• As long as we remain above 5ema I expect a bounce to 1990. A falling 10wma (2010) could stop reversal if we retest it  

$SPX – Monthly

• It is unsurprising to see the $SPX January bar return inside the monthly Bollinger channel
• Anyone pressing shorts under lower bolli (1891) was asking to get squeezed. Level now very important
• Note how 2007 tested the lower bolli and bounced a few times before the major breakdown
• Continue to use daily & weekly charts to navigate shorter trends but do not forget the monthly $SPX chart remains in a downtrend. First sign of reversal to the upside is a monthly close over the 10 month moving avg.

Lately the faith of this bull market is pegged to the Crude Oil $WTIC chart. Last week (1/18) we saw a nice bounce in both; however, the trend remains downward for both as well. My confidence on the overall trend and structure of $SPX will increase when $WTIC manages a close above its 10wma ($36.56)

$WTIC – Weekly

• +17% off the lows in 3 sessions
• Could easily run to falling 10wma (36.56) or a further +13% before encountering heavy resistance
• Previous bottom attempts rallies = Jan 2015 (+22%), Mar 2015 (+47%), Sep 2015 (+35%)

FINAL THOUGHT

As Oil goes, the market goes. Simple. Previous behavior suggest that for this bounce to continue we must see follow thru in the $WTIC bounce. The $SPX closed above its 5ema (1890) which points to a possible trend change to the upside. If long, use the 5ema as a rising stop. Simple.

The $SPX weekly chart points to a possible bounce to 1990 (+4.4%). However, the market remains in a downtrend on a monthly timeframe. A bearish cross of the 10/20 month is virtually a reality, which marks a change in direction. Any bounce should be treated as a trade rather than a long term entry. Below I’ve posted a few induvial charts I am tracking for trades within this possible bounce. Lastly, amid a bearish outlook, Howard Lindzon, co-founder of Stocktwits, captured one possible bullish scenario I’ve had in mind since late 2015. Always remain open to both sides of a trade. Thank you for reading – Gio

$SPY – Possible bullish scenario

$AAPL @ 101.4 / Stop $98.5 (-2.9%)

Breakout from downtrend. Dips look buyable. Once over 20dma it’s a +8% trip to a 50dma retest

$XLE @ 55.74 / Stop $54.1 (-2.9%)

Breakout from downtrend. Dips look buyable. If Oil reverses strongly Energy could easily test 50dma at 61.5 (+10%)

$AMZN @ 596.4 / Stop $584 (-2.1%)

Breakout from downtrend. Dips look buyable. Play on $QQQ bounce with a target of +4.7% at 20dma retest

$NFLX @ AVOID

$QQQ bounce doesn’t = $NFLX bounce. Reported ER and reverse same day just to lose all gains. No need to own

Charts

I wanted to take a quick look at some of data points that really stand out.  Enjoy!

The key theme of the new highs list: yield.  I wrote about the long term breakout in dividend stocks relative to the S&P 500 during the week.  Although the ratio is stretched now, the theme is still set up to outperform through 2016.

The IPO market data suggests Biotech was a bubble via Renaissance Capital

The stock to bond ratio is clinging to life at crucial support.

The consumer ratio has lost its multi-year uptrend.  Can it recover?

We've reached panic levels in oil via Option Pit

The IMF expects inflation in Venezuela to be 720% in 2016.

Defense aircraft spending is at a level not seen since 9/11 via @zerohedge

Muni Bonds have performed as well as any asset over the past three months.  The intermediate trend is losing momentum.

A monster executive shakeup at Twitter was just announced

$TWTR BREAKING: Twitter Bombshell Shakes the Market With Abrupt Changes https://t.co/LLofOB95rl pic.twitter.com/kHCyFqPdQG

— Ophir Gottlieb (@OphirGottlieb) January 24, 2016

The stock market has been highly correlated to oil prices via SoberLook

The Forward P/E of the S&P 500 is 14.9 as we head into the meat of earnings season - FactSet

Jesse Felder notes this is now the worst possible environment for stocks

Thanks for reading

Buy Yield

Dividend Stocks relative to the S&P 500 are starting to break out of a multi-year base.  This is a huge deal.

What does this tell us?  The market wants defense.  We can buy long term treasuries in Q1 and expect to outperform handsomely for the foreseeable future.  We can also buy high yielding stocks, but again it's not a given they'll provide great absolute return.

There's always a bull market somewhere.  This area has a great chance to be one this year.

Thanks for reading!

Prepare for the worst

Coming into the week big struggle for many market participants was this: the conditions seemed damn obvious for a short term rally, but the intermediate trend lower is the strongest to the downside since 2008.  The market is just unable to stop the bleeding.

The S&P 500 posted an inside day Tuesday.  Watch which way it breaks.  It appears to be breaking lower overnight.  If so, all the confident dip buyers from Friday, the 3 day weekend and Tuesday are now trapped.

Despite the SPX inside day, the NYSE stock only advance-decline line keeps hitting new lows

Although SPX and the NASDAQ have held the fall lows, broader markets such as the NYSE Composite and Russell 2000 have also led the market to new lows

For the last week the market has been drastically oversold and hasn't been able to find any sustainable bounce.  During this time, aggressive put buyers have kept the CBOE SKEW index at a very high level.

It's smart to be prepared for a crash like event as the markets are moving aggressively with ease.  

Asset Allocation is on the edge of a MAJOR shift.  Bonds are ready to outperform stocks in a big way over the next few months

Major support is being breached in the Consumer ratio.  A 4 year trend appears to be ending.

With all these scary charts, you'd think fear was high.  Well, it's not.  The VIX is printing 26.  26!  There is little if any fear out there.

It's just smart to prepare for the worst in these conditions.

Trade 'em safe!

On the edge

I started trading in 2009.  I don't know if there has been any chart that makes me think, 'holy shit the market is in trouble'....until the last year or so.

Case in point this measure of the Stock to Bond Ratio..

This two year broadening top in the NASDAQ to Long Term US Treasury Bonds ratio HORRIFIES me.  For the first time in two years, the ratio failed to make a new high on a bounce.  That failure is typically a sign a broadening pattern may actually be a top (or bottom in the opposite case).

This support area is pretty huge and obvious.  With such drastic oversold readings, why can't we get some sort of short term bounce here?  I don't know, but this chart (combined with many other factors) has me VERY negative in my stock outlook this year 2016.  Time will tell how this plays out!

We are on the edge of a rush in asset allocation that may just suggest a crash in equities.  Let's face it, the markets are unstable and the relentless selling pressure has not abated.  You never know if that's going to happen, but I'd rather be positioned for that in the coming weeks (yes even with just a small chance of happening) than against that.

Trade 'em safe!

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!

Potential Market Positive

That's a nice little corrective pattern in the US Dollar index.  There's a chance this is headed back to the bottom of the range.  It would be a nice boost for the market and commodities when they need it most.  Keep an eye on it!