License To Rally? Not So Much For Now...

Authored by Sven Henrich via NorthmanTrader.com,

Our job is to navigate changing markets and we use technical and macro analysis to identify major market turns amidst periods of conflicting signals, emotional markets and often high uncertainty while staying keenly aware of risk to our thesis at any give time. In last weekend’s Bear Trap we discussed the technical signals that suggested a large rally could unfold and outlined some of the macro triggers that could light a fire under these markets. “Bears watch out” I stated. Indeed US markets responded with the strongest weekly bounce in 7 years as one of the triggers, the Fed, came through. A second trigger may have been pulled this weekend (China) giving markets license to rally further.

In this edition of the Weekly Market Brief I’ll review the facts and then outline some going forward considerations.

Let’s start with the technicals.

On twitter and in last weekend’s brief I outlined the technical case for a rally targeting MA reconnects:

On Friday $ES reconnected with its 200MA:

An over 5%, 130+ handle move off the lows in a matter of days.

I had also outlined the $NDX forming a potential bullish wedge and a positive divergence on the internals. Here’s the follow up chart:

One could argue that the internals have yet to show a dramatic improvement and that may be a red flag. But fact is the wedge pattern has remained very clean technically speaking as of now and a break above would suggest higher prices to come.

Especially as it fits with the historic oversold readings on tech that I outlined last week. Follow-up:

This chart is still vastly oversold and suggests it has a lot of potential room to rally higher still.

As you can see the monthly trend line also held last week, an important consideration going forward. I’ve outlined several of these trend line saves in “Saved Again” yesterday and you can see them there.

For this discussion I just highlight again the chart of the Dow Jones Global index:

If this is indeed a bull flag then bears may be in major trouble, especially considering as these types of potential bull flag patterns are visible on other charts as well:

$NYSE:

$XLF:

So let’s hone in on some reality here: Bears have failed to break these trends for now. Trend lines have held, even in individual stocks such as $AMZN.

Here’s the follow up to last week’s $AMZN chart, a strong reaction:

On $SPX bears again failed to make lower lows. $SPX throughout 2018 has now printed a series of higher lows:

And that’s a big fat problem for bears in the here and now, especially as some of the signal charts now overtly suggest that there is a lot of potential room to rally. Here’s a follow-up to the equal weight chart I highlighted last week:

In fact, based on all of the above I could even make the case for new highs to come targeting that elusive 2.168 fib target discussed in January:

After all, the 2009 trend line has held twice and the monthly 20MA (the middle monthly Bollinger band) has also held twice as support. Big support confluence. So why not new highs, especially if the macro tiggers go in favor of bulls.

And from the looks of it they are.

Let’s start with the Fed.

Last week I outlined the following:

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.

And boy did the Fed cave and rate expectations dropped like a brick:

Now the Fed may all think we’re stupid, but I can look at charts, price and timing of Fed reaction and you tell me if this is not a perfect script replay:

Really? REALLY? A month ago the Fed was all confident and insistent on their rate hike schedule. Just like Janet Yellen was in December of 2015 during her first rate hike only to cave 2 months later after markets were dropping firebombs everywhere. Her caving came after the January counter rally failed and stocks were dropping again into February. Powell just caved after the October counter rally failed and stocks were dropping again in November.

So either this is a giant coincidence or Powell just pulled a Yellen at precisely the same time giving markets again a license to rally.

Last weekend I also I outlined another bear trap trigger:

‘“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.

And folks, here’s your “agree to” headline:

US, China agree to 90-day truce to hash out trade differences:

“It’s an incredible deal,” Trump told reporters aboard Air Force One”

In The Summit I stated: “Trump needs a perceived win”.

Now he has one and is positioning it as such even though there is no deal. Just a truce or pause perhaps.

And spread market futures are indicating a sizable gap up as of this writing hours ahead of official futures open tonight (subject to change):

Bottomline: Speaking technically, and in context of the now emerging triggers, bulls have now a license to rally this market and they could rally it all the way to new highs into Q1 2019 with the prospect of a positive China deal hanging as a carrot in front of them. It’s possible.

But there are major hurdles and risks ahead.

For one Brexit deal approval has run into major roadblocks in the UK and European markets clearly want a resolution on December 11. OPEC is meeting on December 6th and oil markets remain in a major funk.

Then there remains event risk as it pertains to the President himself. His former campaign manager, his former attorney and his former National Security Advisor are all in major legal trouble. Manafort is in jail already, Cohen just plead guilty to lying about Trump’s business interests in Russia and Flynn is expected to come clean on Tuesday in his plea. The president’s twitter feed has been pre-occupied about the Mueller investigation in recent days. Things continue to brew there and pose headline risk.

Tuesday of course is December 4th and seasonality suggests that the first two weeks of December can be shaky.

Example:

After all a larger gap up into early this week may bring about short term overbought readings. Tax loss selling is a consideration as well as are multiple points of resistance and open gaps ahead.

Lest not forget there is technical damage on the charts and prices would run into major resistance ahead:

And charts like this open the possibility that this current bear trap may turn into a bull trap eventually:

After all liquidity is still being drained from the system, growth is still slowing, no definite China deal has been accomplished and earnings comparisons will still lag in 2019.

Hence the Fed’s efforts last week may ultimately turn out to be ineffective and only delay the perhaps inevitable: That these trend lines will eventually break for good to the downside.

Is the risk zone we outlined still applicable in 2018?

With higher lows in place and only 4 trading weeks left in the year it seems highly unlikely frankly, but not without precedence.

The very last year when markets made a new yearly low in December? All the way back in 2000:

That year too had a double top with weakness into October and November and the late November/early December rally fizzled into new lows. Back then that turned into a 2 day affair before a major rally into January which also produced lower highs before the recession unfolded.

That’s one year out of the past 19. Not exactly an encouraging historical precedent for bears.

It’s true that the $WLSH chart still shows strong resemblance to 2007:

But to prove their case bears need lower lows. And so far they have failed miserably.

Outlook: Last week’s massive rally and indicated further strength have so far supported the Bear Trap scenario. We’ll be reaching short term overbought readings into early December just ahead of traditional short term weaker seasonality. There likely will be some fade/retest trade opportunities. Indeed bulls need to avert a sell the news scenario. A renewed drop below 2700 would constitute a major warning sign for bulls. A drop below the October/November lows would fully open up the lower risk zone again.

Headline risk and technical resistance remain part of the market’s make-up. But bulls have been given a license to rally these markets into year end.

They better not fumble this or this setup turns into a bull trap fast.

[ZH: For now, in spread markets, The Dow is up around 225 points from Friday's close - so not entirely enthusiastic]

Source: IG

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