Bear Trap?

Authored by Sven Henrich via NorthmanTrader.com,

Are markets setting up for a major bear trap? Let’s explore the question. Look, I could show you a 100 charts that say the same thing that everybody already knows: Things are terrible. From crude crashing 7 weeks in a row, $FAANGS dropping a trillion bucks in market cap and individual stocks getting taken out back and shot. Crypto is a wasteland. Global growth is continuing to slow down hard (Germany just printed its lowest GDP growth in nearly 4 years) and US growth is heading back to a 2% regime. Bulls that were aggressively pushing for ever higher targets are sheepishly reducing them fast. One analyst dropped his 3,200 year end target on $SPX to 2,900, another dropped his 2018 Bitcoin target from $25K to $15K (it’s trading at $3,700 this weekend) and downgrades are permeating the daily news cycle. Long gone is the talk of global synchronized growth that dominated the headlines earlier in the year.

And currently the year is shaping up to be the worst ever in terms of total asset classes in negative territory, 90%:

In short: Bears have taken over everything and are dancing on the corpses of bulls that have mocked them for so long.

Heck they have even taken over the malls

Last week’s price action was the most miserable Thanksgiving week in recent memory.

In lieu of that I have a question:

Why haven’t we taken out the lows? I mean, given all this backdrop of global misery and wipe outs in asset classes, why is the $SPX still in range?

Indeed at this very moment that chart says higher lows. Now of course that can change in a hurry next week and we may enter that next risk zone we’ve been discussing in previous Weekly Market Briefs:

But why haven’t we seen new lows yet? What else do bears need?

I tell you what they need: A failure for the US and China to come to a trade war resolution, the Fed to remain hawkish into 2019, the Brexit deal to fail in the UK parliament (it was just approved by the EU) and the ECB to follow through on ending QE.

And here in lies the potential bear trap on triggers that could kick in the technical signals that are increasingly abundant suggesting a major rally may be in the works.

“We agree to” are the 3 magic words that would cause a buying bonanza if they are uttered in some form during the G20 meeting between President Xi and President Trump next weekend. Never mind the details, any real sign of progress (not the fake teaser headlines that markets no longer take seriously) and it’s off to the races.

A no Brexit deal would be bad for the UK. Arguably worse than the deal they have on the table right now. Will the UK reject a deal with no alternative in sight? An agreed deal would likely produce a relief rally in the UK and in Europe. Certainty is preferred over uncertainty.

And Draghi has to make a decision. Can he really afford to end QE if markets and growth keeps falling all around him?

Just looks at that $DAX, it’s horrible:

No, Draghi is staring at a major policy failure just a few months ahead of his retirement:

In lieu of a major global market rally emerging soon the Fed is increasingly penciled in for a dovish rate hike in December, meaning they raise rates, but then signal a slowdown or pause in rate hikes for 2019. What? You really think the Fed wants to be responsible for a stock market crash into Christmas? Hardly. Lest not forget Janet Yellen famously caved on her 4 rate hike schedule penciled in for 2016 when global markets got hammered in early 2016. That market action produced $5 trillion+ in global central bank intervention after all.

Which brings me to the mystery chart I’ve been teasing a bit on twitter. In the larger geopolitical and macro context I outlined above this chart may be the most important chart on the planet right now.

Here it is, the Global Dow Jones, an index that track 95% of global markets:

It’s an incredible chart actually. You can see how precise the price action has tracked the 2 rising wedges. In 2007 the global bull market ended when the wedge was broken to the downside. Since the 2009 lows a new, larger wedge has formed and it’s just as precise.

Fact is the world is again at key risk breaking its bull market trend. And we see it in charts everywhere. Right in front of all the potential triggers I mentioned above.

See a sustained break of the trend line and the global bull market is over. The stakes couldn’t be higher.

The current support trend line was formed right at the moment when global central banks embarked on their $5 trillion buying sprees between 2016 and 2017. The resulting asset inflation resulted in over 16 months of uninterrupted global market gains with the final blow-off top occurring on the heels of the liquidity bomb that US tax cuts represented. Note global markets temporarily tried to pierce the upper trend line on historic overbought readings but then failed to hold the trend line with the February correction.

And now we’re back to the lower trend line.

So where’s the bear trap? The bear trap would be a failure by bears to create a sustained break of the trend line.

Indeed, one can see a potential bullish pattern emerging here, that of a bull flag, a bullish pattern not unlike what we also saw in 2016 which was a bullish wedge then:

Get some or all of those triggers I mentioned above resolved and one can imagine all kinds of rally scenarios. Even new highs perhaps? Another run at the upper trend line? Or lower highs? Either way a positive resolution to some of the triggers outlined above and one can envision a larger rally emerging into year end and perhaps into Q1 2019.

And there are very specific technical signs that would support such a rally.

Let me show you a few to consider.

Equal weight, $XVG:

$XVG printed a new low last week and retested its 2007 and 2014/2015 highs. But something notable has happened. We can see a positive RSI divergence on these new lows. As you can see in the chart positive RSI divergences in $XVG have coincided with major lows including 2009 and the above mentioned 2016 lows. Coincidence?

But the trend is broken for $XVG and that is a concern for any notion of future new highs, but for now it suggests potential firepower for a sizable rally. Also note the RSP:$SPY ratio has ticked up last week.

Why? Because there are positive divergences in the internals.

Example: $USHL:

As miserable as last week was high/lows printed much better readings than during the October lows. That script looks similar to the 2015 and 2016 retest lows.

What about the carnage in tech? Check this out, here’s the $NDX monthly futures chart:

It has not broken its 2009 trend line. And even if it were to on a spike down basis note the rather pronounced support line that is lurking just underneath. Connecting 2007 to 2014/2015 highs & offering support in 2017 during Brexit. We’re a stone throw away from that trend line and hence any break of the 2009 trend line may prove to be temporary.

So you see nothing has broken yet and major support is just below.

And here’s another interesting chart pertaining to the Nasdaq, its internals are also showing a massive positive divergence as $NDX is printing a potential bullish wedge:

Very clean all this. Just saying. Bears watch out.

And speaking of tech, just how oversold is the sector? Here’s a little perspective that should raise some eyebrows:

$NDX MACD histogram is more oversold than even during 2009, it’s now at levels not seen since 2000. And even then these type of readings ended up producing massive counter rallies.

And look closely at the broader US market context. Here’s the $VTI, the all market ETF:

Also scraping along its 2009 trend line, but perhaps just as notable, we’re sitting right at the monthly 18MA. Don’t ask me why, but the monthly 18MA has self evidently been a major market pivot for years. Yes it has fallen below it several times, but many more times it has been key support.

What about the horrid breakdown action in individual stocks? Take $AAPL for example, totally broke its recent trend:

Ugly no doubt. But also note its weekly RSI, the last time it was this low was at the 2015 lows. Potential firepower for a counter rally. Think a positive China/US trade resolution would have an impact on the stock? Better believe it.

$AMZN? Curiously once again saved its trend line last week:

The Goldman Sachs horror show? It too looks to be very close to major fib support while being massively oversold:

These are mere examples, but they highlight an important point: Many of these stocks are vastly oversold and are, as markets, sitting near key support levels.

Which brings me back to the global picture. As miserable as the $DAX chart looks (as I mentioned at the outset), even here one has to acknowledge positive divergences and a potentially bullish structure emerging:

While crude has also entered a zone of key support from which a sizable rally could emerge:

Add sentiment to the equation…

…and a potential positive resolution to any of the triggers I mentioned above and you have the ingredients of a major bear trap.

Next week:

As in October markets are once again hanging by a thread just prior to month end. In late October we saw a massive rally emerging from key support to save the monthly trend lines. Will we see a repeat?

Now that buyers have lost 2700 last week hence immediate downside risk is a retest of October lows and a break into 2585-2595. In context of global markets this is a support zone that probably needs to be defended with vigor to avoid a major bull market trend break.

Remember the risk zone:

Is a dirty intra week drop to February lows possible? Absolutely. Would it mean the end of the 2009 trends? Depends where we close at month end. As we saw in October quick and fast bounce backs are clearly possible.

However also note the technical backdrop I outlined on twitter:

Bottomline: From my perch there is a solid case to be made for a bear trap in the works. The technicals are lining up for it, but it also requires the positive resolution of some macro triggers in the days ahead. Brexit, Fed, ECB and trade war. I can’t predict what the G20 meeting between the US and China will produce other than a major gap event in either direction on Monday December 3rd. I will suggest however that both sides have a vested interest in markets not collapsing further into December. Bears, as successful as they have been, have so far failed to produce new lows. And perhaps that should be a reason for them to not get too cocky at this precise moment in time, especially considering one additional factor:

Bonds have so far averted the feared breakdown and the yield scare has for now disappeared from the headlines.

And maybe, just maybe, the bond market is signaling something other than an economic slowdown, perhaps is it signaling a dovish rate hike to come. Bear trap?

If it is to be the technicals show signs for its potential.

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