Is The Equity Market's Day Of Reckoning Beckoning?

Tyler Durden's picture

We now appear to be close to the day of reckoning that likely determines what the coming weeks/months hold.

  • Do we step back from the brink, see our politicians reach an agreement and carry on? Although to be fair, in 2011 the break below supports that led to accelerated losses in the equity markets actually took place once an agreement was reached.
  • Do we break lower thereby causing the negative feedback loop/concerns that feed back into the economy, kill any possibility of tapering and sees the Fed re-establish its dovish credentials (Like 1998 and 2011)
  • Do bond yields push higher after an agreement thereby increasing concerns about a negative feedback loop into the economy, housing, emerging markets, Europe (Like 2011) and ultimately the equity market?

Time will tell us the answers to the above questions, but whatever happens, Citi notes it looks like the price action in the near future is at pivotal levels that need to be watched closely.


Via Citi FX Technicals,

The Equity Market - Day Of Reckoning Beckoning?

With important technical levels in the spotlight and the clock counting down on the budget and debt limit (non) talks the coming days/weeks look pivotal in this respect

Below we look at what we think are the important levels to focus on.

DJIA pattern today looks very similar to that seen in 2011. (Daily chart)

After a 2010-2011 surge helped by QE2 in November 2010 (A move that was guided since August that year) the DJIA peaked with a head and shoulders formation completing in early August 2011(02 August break) at the same time as a break below the 200 day moving average.

The end of QE2 in June 2011, uncertainty about the US debt limit negotiations and (icing on the cake) a downgrade of the US by S&P on August 5, 2011 (Friday) created the backdrop for a sharp fall.

The target of the head and shoulders top was about 10,800 and the actual low hit in Oct 2011 (04 Oct) was 10,404. This gave us a high to low fall of 19% in the DJIA while the S&P fell 22%.

The present pattern could be viewed as another potential head and shoulders top with a neckline at 14,883 OR as a double top with a neckline at 14,760. The target on a break of this range would be 13,800-13,900 or about 12% high to low. (Compared to a 16% target in 2011 that was overshot). The rising 200 day moving average now at 14,728 also needs to be watched on a closing basis.

DJIA today compared to 2011 (Weekly chart)

The 55-200 week moving average set up is (not surprisingly) also similar, albeit more stretched this time than 2011.

In 2011 the DJIA eventually overshot the 200 week moving average by about 2%. A repeat of that would see the DJIA as low as around 12,200 or 22% off the peak set post the FOMC meeting.

While in 2011 we had some momentum divergence, this time around we have clear “triple momentum divergence” taking place at the peak.

The 55 week moving average stands at 14,354 while the 200 week moving average is at 12,441

US 1 month bills. Showing stress just like late July 2011

Has now completed a double bottom suggesting higher levels still

Very reminiscent of what we saw during the debt ceiling discussions/US downgrade in late July-early August 2011

US 1 month bills remain elevated

Accelerated above the 17 basis point peak seen on 29 July 2011 during the debt ceiling wrangling that ultimately saw a fall in the DJIA of 19% and in the S&P of 22% by October that year.

The double bottom now established suggested a move above 30 basis points which was seen 2 days ago. That both took us above the Fed funds range and also gave us a level not seen since October 2008.

The peak in 2011 was seen on 29 July and the DJIA broke the neckline of its head and shoulders 2 trading days later.This time around they both broke on the same day albeit that the 200 day moving average is still intact so far.

(While these yields have started to move lower this morning stress is now appearing in the Nov/Dec bills as talk of raising the debt limit for 6 weeks does the rounds. Happy Thanksgiving – It looks like Washington has an oversupply of turkeys)

US 1 month bills and the DJIA

In addition, we should not forget that the DJIA posted a bearish monthly reversal off the trend peak in August this year at 15,658. While we did get a daily close above that level on 18 Sept. (Fed debacle day) it was not sustained on either a weekly or monthly basis suggesting that this reversal is still valid.

S&P weekly chart shows clear triple divergence.

Suggests that we can move lower still. However the critical supports are on the monthly chart and are much lower than present levels.

S&P monthly chart and the 12 month moving average when market gets a monthly close below.

Momentum has been diverging here for some months just as it was in 2000 and 2007 suggesting lower levels could still be seen. However, we would have to break below much lower levels before our concerns would become elevated. The critical supports we see here are

– 1,576: The 2007 high and the 12 month moving average.
– 1,555: the rising trend line support (Weakest of the supports)
– 1,553: the 2000 high.

A break below these levels (At least a weekly close), IF seen would suggest a danger of a deeper fall.

The falls of 2000 and 2007-2008 both accelerated once we breached the 12 month moving average on a closing basis

More importantly the falls of 1998 and 2011 (Both 22%) accelerated on a break of the 12 month moving average (Some acceleration was also seen in the 2010 fall of 17% but we were not as elevated, nor had we spent as much time above as the other periods) and prompted the Fed to move towards an easier monetary policy.

In 2011 this was the putting in place “Operation Twist” after QE2 had “ended” in the summer. One thing has been entirely consistent in the path of “Unorthodox monetary policy” in the last 5 years. Every attempt by the Fed to “withdraw the punchbowl” has resulted in the markets and the economy “throwing a hissy fit”. This has resulted not only in the Fed “not” ending this “destabilizing policy” (in our opinion) but actually expanding it. With Janet (Super Dove) Yellen confirmed at the helm now we do not expect this to change.

It is not inconceivable that she will try a “Helicopter Ben” route in the early days of her “tenure” and try to sound a bit less dovish. (So concerned was he that this “moniker” suggested he would not focus on the dual mandate that he spent most of 2007 trying to show his inflation fighting credentials. Unfortunately that was poor timing and resulted in the Fed being far behind the curve compared to the 1989-1991 and 2000-2002 episodes of stress)

IF things tend to “go south” in the economy and the Equity markets (20%+ correction as we still expect) then we are fully confident that her natural tendency will show through. In that instance, if we have not tapered we will not. If we have, we will stop. Ultimately we could even see a consistent path with other episodes of the last 5 years. Not only do we not end up holding the line and taper to ZERO (Which we still believe is the correct thing to do) but it is possible we ultimately increase the rate of expansion in the Fed’s balance sheet.

Consumer confidence and the long term S&P chart also support the potential for a deeper fall

Within 3-4 months of the consumer confidence peaks in 2000 and 2007 the Equity market began a sharp move lower

In both 1998 and 2011 we also saw a sharp move lower in consumer confidence and a 22% fall in the S&P 500 both times.

In 2005, while we did see consumer confidence correct sharply but the equity market held up well. However, there is nothing about the present backdrop that “resonates” with us as being similar to 2005.

Levels to watch on the VIX

While we have completed a short-term double bottom here it is far more important whether we complete the larger double bottom as we did in the first week of August 2011.

The neckline on this double bottom stands at 21.9% with good trend line resistance also at 21.5%

Essentially, a weekly close through 22%, IF seen would clearly confirm a break and suggest a move to at least 32%. Such a development would be consistent with us seeing a move to at least the head and shoulders/Double top target on the DJIA of 13,800-13,900.

VXN (volatility of the NASDAQ) may be the “tell” for the chart above

This week it has already breached the double bottom neckline (21.44%) which suggest a move as high as 30%+. In addition it moved above the 200 week moving average (20.92%)

IF we head into tomorrow and are still trading above this range, it would suggest a real danger that the levels mentioned in the charts above could come under pressure in the days and possibly weeks ahead.

To sum up:

We retain our overall view that the big picture set up (2000-2016) continues to follow a similar path (with some material differences but a lot more similarities) to that seen in 1966-1982.

Within that, the present period also has some similarities to:

  • – 2000 (Mainly Equity market)
  • – 1998 (Fed policy, EM, Equities, Fixed income and the USD but in particular….
  • – 2011: (Fed policy, EM, Equities, Fixed income, European periphery and the USD

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LetThemEatRand's picture

Fuck you Citi.  The only thing that matters is whether your bought and paid for politicians overcome the will of the American People and raise the free shit for Citi and other banks ceiling.  Did I say fuck you already?   Is there a chart for how fucking corrupt you fucking bankers are?  No, because it would be off said chart, and you would need another chart to express how far off the corrupt chart you are.  Ad infinitum.  So why bother.

Zer0head's picture

Robert Reuben

Larry Summers

American Taxpayers bailout of Citi  thanks to the efforts of the aforementioned gentlemen

for some reason omitted from this Citi 200yr anniversary advertisment

LetThemEatRand's picture

Don't forget former CEO of Goldman Sachs Hank Paulson, who also (coincidentally?) was Treasury Secretary of the United States of America when the bailout happened.  If I recall, $750 billion "seemed about right."  Fuck you guys.  Fuck.  You.  We're on to your shit.

Spastica Rex's picture

We're on to your shit.

I think you're using "we" pretty liberally.

King_of_simpletons's picture

President Obama wants his name attached to something big in history. A legacy. A default would qualify as something historic and will be talked about for generations. How cool is that ?

el Gallinazo's picture

Well, he is already the first POTUS to receive a Nobel prize for his work as a Chicago "community organizer."  I figure that is historic.  What more could he want?

Disenchanted's picture
Post-bailout bonuses to bankers were wrong, Paulson says

re: "750 billion" Didn't he pull that # out of his ass? btw...There's more than one source that seems to think that total bailouts ballooned into quite a bit more than that.

Renewable Life's picture

Wake me up when the Dow is at 12000 and the EBT cards haven't been turned back on and we miss the payment on the oct 17 TBill!!

Until then, I'll be sipping cocktails and enjoying the only the Politicans in California haven't fucked up yet, the weather!!!

knukles's picture

Just wait..... the spraying's resumed in my area.

Tabarnaque's picture

How about California receiving radioactive rain from Japan?! You might want to search a bit more on this silenced topic. 

el Gallinazo's picture

Renewable Life, you ever look out the fucking window?  Blue skies are just a nice memory (for those who have managed to avoid their brain nanochip implants so far).

Why in the World are They Spraying?

*Available in HD with Romanian subtitles :-)  Void where prohibited.

max2205's picture


DOGGONE's picture

Look at this.
USA is the leading country, but that is NO justification for doing the biggest con to its citizens.

NDXTrader's picture

Plunge on no deal accelerated by margin hike margin calls this week. It will scare the politicians and "good" news will be leaked Friday. I could see us getting to the 1550-75 level very quickly. After that its off to the races - $85 billion a month leveraged wont be denied

lolmao500's picture


socalbeach's picture

Over the last 2 years, a long gold - short S&P trade would have been a disaster. I think it's a good trade now though.

Yen Cross's picture

fx and bonds laughed at the equity markets. The dxy only gained .five percent. yea thereshould be a good smackdown tomorrow.

thismarketisrigged's picture

i really fucking hope so.


if the same rhetoric is going on by tomm when the futures open, there is no reason why dow furtures should not open down 250-300 pts off the top and s&p futures open up down 40-50 pts, considering that the markets rallied 500 dow points and 45 s&p points on nothing but rumors which now have been proven to be total bullshit.



ebworthen's picture

Any serious drop in the Wealth of the 1% indicator (the Stock Markets) and Yellen will double current QE.

They have bailed out banks, insurers, and corporations - they have cut Food Stamp Benefits - they have foisted the largest asset confiscation/taxation scheme in a century upon the population (Obamacare) - and continue to feed Wall Street with the blood of future taxpayers.

These mammon lusting harpies of evil, corruption, and destruction will not be denied their blood sacrifices!

More QE!  More debt!  More hollow promises!  More Kabuki theater!  More lies!  More deception!

"Tomorrow and my fellow human being can rot!" is their motto!

Monsters!  I see monsters!

Spastica Rex's picture

But I heard our chocolate rations are increasing. 

RaceToTheBottom's picture

Just reducing the cacao content....

buzzsaw99's picture

Citi the welfare case is reading the tea leaves. lulz lulz lulz

goldenbuddha454's picture

We don't know when to deal will be made, but we can be sure that McConnell will rollover on Reid's command.

olto's picture

Those bots have a mind of their own----they may be hooked into the sports page by tomorrow night and like what they see and go up another 500

these are not real markets, are they?

They can do anything they want until the streets fill

hfbamafan's picture

LOL, I am trying to figure out that on a Friday, before a weekend of uncertainty, why they decided to rally the market.

I hope someone hedged their positions because this is going to get ugly. Fast

AgileArjuna's picture

Bring out the Deer

adr's picture

The day of reckoning has long since beckoned. I think that was Priceline going past $600 a share, let alone $1000.

Netflix was a huge bubble at $280 the last time it hit that level, yet now its undervalued? Really, on what planet?

If an alien landed and you explained the stock market to him and how we value corporations, he'd give you the equivalent of his society's middle finger and get back in his spaceship placing a permanent red X over Earth on his chart.

disabledvet's picture

not if that Alien was good at math. I simply can't get out of my head that what we have here is a CHOICE not some "desperate act." The folks doing this thing are saying this what is wanted. This is like the 70's? I say BULLSHIT. we were a massive net oil consumer then. the State was ominopotent given the Cold War and the draft. We could see no way ou of Vietnam (even though everyone knew losing would be the outcome.) I simply can't get out of my head...and I'm not saying this is popular or even true...but in 2008 we had some type of policy success vis a vis a dramatic and material systemic failure..."but what we really meant to say is we prefer policy failure in addition to the material and systemic collapse." we've already had Lehman 2.0. it was called "Detroit" in my view. is what is being said here that "the plan is to have more of this"? this is the plan for moving Forward?

I Write Code's picture

Market goes where Bernanke clicks his mouse.

Fukushima could blow half the Earth into the sun, and Bernanke's hanky panky would zero it out as far as the US economy goes.  Until the day when Bernanke's hanky panky blows the US economy out Uranus.

traditionalfunds's picture

Tough to compare to 2011 since there is no Greece crisis or equivalent in the picture at the moment. Even if the GOP fails to vote for a debt limit increase this week, the equity market fall that follows will lead to a same day second vote that will pass.

HowardBeale's picture

One Way or Another, We're All Fucked (OWAWAF). 

Biophysical reality meets political criminal and says: "Pfht."

Pike Bishop's picture

Fuck it. Declare a Hindenburg Omen and let's get on with the carnage and ruination.

Light up all smoking materials. Seats up or down, it won't make any difference...

Prepare for impact.

NDXTrader's picture

C' mon brothers she's not dead yet. We've got along ways to go boyos

DOGGONE's picture

Hey ZH,
Just show this (from WSJ)
Then ask 'what next', show this

HowardBeale's picture

Why the Market is Definitley Going to Plunge: JPM, now with all of its illegal skimming/thieving/extorting/bribing/manipulating/etc. activities exposed, most in litigation for the coming decade, has NO WAY to make a profit--other than shorting an historically overvaliued bubble of a market. Get ready for the plunge of a lifetime...

Brett Merkey's picture



Meanwhile, we can rest assured that well-paid regulators have our backs...

“The big news here is, the fees are so outlandish, they can actually wipe out all the profits,” says Bart Chilton, one of five members of the Commodity Futures Trading Commission. Even though the CFTC oversees managed futures, Chilton says he hadn’t been aware of the effects of the high costs for investors.

“We absolutely need to do a better job of letting consumers know in plain English what’s going on,” he says. “Those numbers tell a story. It’s astounding.”

How Investors Lose 89 Percent of Gains from Futures Funds
gatorengineer's picture

Well lets all take a breath calvary is comming on October 30th (next fed meeting).  I think at most you will see a 5-7% correction that will only be daytradeable because of all of the rumors fueling the bots.  

Fed likely may double down at the end of the month, or at least a rumor of that is all that it will take to feed the bots.

I think the only way that this is broken is if we get a large opening stop clearing gap down tomorrow which I doubt (say 5% drop on open), 


Sufiy's picture

Peter Schiff: Debt Ceiling, Gold, and Janet Yellen - Hype vs. Reality

Peter Schiff gives us a great big-picture view on the latest developments in the markets and, particularly, ongoing Gold manipulation.  Separating the Hype vs Reality he provides the explanations on the Janet Yellen's real track record and her intentions, describing the implications of her ascendancy to the FED Chair for the ongoing debasement of US Dollar and Gold.

Howdan's picture

You know, when I read some (Highly esteemed and respected) commentators here on Zerohedge saying "They'll just increase QE to $100billion a month", I laughed out loud and thought "Yeah right".

Now....I get a horrible, sinking feeling that Yellen-Uber-Dove will actually increase QE quite possibly to over $100 BILLION each and every single month.

I mean, whaaaaaaaaaaaaaat? The world has gone stark-raving blooomin' mad.


Hedgetard55's picture

$85 large (leveraged 10x) doesn't buy as many shares at DOW 15,000 as it does at 10-12,000. Gonna need MOAR QE.

kill switch's picture

I remember when 85 large was in thousands,,,, That's progress!!

kenezen's picture

On my Blog On hedgemastermb, I've posted a call to my followers on August 1st 2013 that the S&P would begin sideways movement and to take profits from my advice to buy @1010 and subsequently @ 1110 because it was a international currency replacement next to gold.  I do believe at the very end of this year or early next the S&P will go down. I'm a Fundamentalist  Consumption and production are the two basics of trade and price internationally. My assessment is consumption for a myriad number of reasons will go down!  

World of Debt's picture

Good article and nice charts. It's a WORLD OF DEBT! See the Hilarious Music Video "WORLD OF DEBT":