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!

Patience pays 2.0

Biotech stocks are kind of interesting heading into the holiday shortened week.  They also show why the market is so hard right now.  When the market is hard, you don't have to trade.

The group saw intraday buying Thursday and Friday.  The ETFs also failed to make new lows with the market on Friday.  That tells us there MAY be some risk appetite in the market.  

The problem here is the larger measured move suggests a move to the mid 40s.  Measured moves are never sure things, but this backdrop isn't what you want to see when looking for a sustainable market bottom.  

After such a swift down move, it's entirely possible the end of week action shows restraint by short sellers.  Many biotech stocks are at support after breaking down out of larger patterns.  Perhaps sellers are waiting for moving averages to catch up and provide better trend following short entries.

On top of that, throw in the fact the S&P 500 is at crucial yet very obvious support.

Although a near term long trade may work in some individual stocks, I would rather wait for a trade aligned with the current downtrend than force a long idea i'm not comfortable.  That said, a great short trade might not show up either.

The point is, it pays to be patient and to make a habit of taking only GREAT trade ideas.

Thanks for reading.  Trade 'em well!

Variant Perception

Market positives are hard to come by these days.  Well, at least that's the perception.  Howard Marks spoke to this in his latest memo: On the Couch

One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity.  Their failings take two primary forms: selective perception and skewed interpretation

The bottom line is that investor psychology rarely gives equal weight to both favorable and unfavorable developments.  Likewise, investors' interpretation of events is usually biased by their emotional reaction to whatever is going on at the moment.  

My friend Frank Zorrilla (@ZorTrades) made a great point on Twitter Friday:

Here in the short term, strictly going to focus on what can go right..only works if you believe in up and down, not up or down

— Frank Zorrilla (@ZorTrades) January 15, 2016

Market breadth and sentiment is extreme enough that we need to think hard about the positives and potential positive developments moving forward.

It's also true that earnings season often sees swings in both directions as the news flow hits the tape.

One in 'our face positive' that deserves discussing is gasoline prices.  From Labor Day through Q4, gas prices were stable.  With the market meltdown, prices have dropped over 20% in just over two weeks.

Looking at the last 16 months of price action, there are a few interesting points to be made.  First, Q4 2014 saw Gas prices plummet 37% through year end, essentially crashing during the holiday season and continually providing a boon to holiday shoppers.  That boost was nowhere to be seen over the holidays.

Also note in Q1 2015, prices rallied all quarter.  Again, all of a sudden prices are 20% below where they were one year ago and 40% below where they were at the end of Q1 2015. 

This is all coming while retailers have maintained discounts beyond the holiday season.  It's a nice combination for the middle class consumer.

Keep this in mind as your favorite consumer discretionary companies report earnings.  A relative headwind from Q4 all of a sudden become a large tailwind for Q1.  Of course these numbers get modeled in and factored into corporate forecasts, but with all of the pessimism and negative news flow, they likely aren't priced in.

On a similar note, the ratio of consumer discretionary stocks to consumer staples stocks, coined as the consumer ratio, is testing a four year rising trend after a dramatic drop.  If this ratio is going to turn, it will very soon.  This coming while the market is sitting at major support.  

Thanks to Mark Newton for pointing this out on Friday.

At the start of the year I wrote 'What's up with retail'.  The breakdown setups were large and have significant technical implications.  I noted that one major concern was how retail struggled to make progress in 2015 even though energy prices were continually crushed.  That STILL is a concern as it may signal broader underlying issues with the consumer.

It'll be interesting to watch this measure of risk appetite as the market reacts to Q4 earnings.  The setup for some risk taking and an improving consumer discretionary group is present.  

Thanks for reading.  Trade 'em well!

Come on, America

Any rational republican's worst fear is coming true.    Trump is actually strengthening in the polls.  Most normal people are disgusted and can't even watch the joke that is Republican debates.  It's all working in Trump (and eventually Hilary's) favor.  

I don't get it.  Any jerkoff can be a loud, volatile asshole about everything.  

Oh you think he's a successful businessman? Again, any asshole with a 200M inheritance given the keys to a family empire could have made 5x their net worth in US commercial real estate over the last 35 years.

Chart via Scott Grannis

It's clear that many Americans want a drastic change away from Obama's policies (as they probably should).  They want change so bad, this foolish caricature sounds pretty damn good.  Trump's marketing team is genius, but he's definitely not the man for the job.

Come on America, we have to get our shit together!