Stocks - SP500 Divergences
Updated
Idea for SP500:
- For me there is no question that there will be a major correction in indices in the near future (by EOY - Q1 2022). There is also no question for me that it will occur before interest rate hiking by the Fed (if they indeed raise them). It is just a matter of getting the right entry and getting the prize.
- Don't be excited by daily fluctuations (choppy markets signal tops and precede bear markets). Big rips are caused by negative gamma only, not actual bull interest, despite what media or inexperienced trader crowd is blaring. Keep conviction, track the fundamentals, and watch the smart money.
- Something I am watching are divergences in market breadth and the index.
- Lesser corrections seem to be preceded by clear market breadth divergence:
- Major corrections seem to be preceded by bear flag type patterns in market breadth as indices peak to ATHs - this is very common:
- Nasty ones where the lower MAs (20D & 50D) lead, but 100D and 200D are unaware:
This phenomenon occurs because investors are iteratively scaling out of risk, moving into more and more defensive assets. Currently it is FAANGM only pushing up the markets, but they are basically the last line of defense.
SP may be down 3% from the top, but had you been in the reflation trade, you are likely down 10%. Meme stocks or crypto... 50%. SP is not actually an accurate representation of the broader market. The indices are a lagging indicator, as MMs have interest in achieving pinning to certain prices for the options market. It will follow the flow of money in the end.
When market breadth (especially 100D and 200D) don't give fair warning, it makes sense for the corrections to be deep, as less opportunity to hedge. We are not quite there yet, and it would appear that smart money is hedged sufficiently (also looking at SKEW index). Right now it would be no surprises for institutional traders for a healthy correction (5-10%). The real shocker at this point would be the bear flag breakdown on market breadth setup, where BTD doesn't work.
We know where the trend is going to go, but how can we achieve granularity for a signal to enter short though?
- Since FAANGM is the last line of defense, we should probably look there for a clue - they all have earnings next week, which would be my bet for a selloff:
- AAPL - it could be topped, but probably better to wait until it shows more weakness (crosses 20D):
- TSLA - seems to be at LPSY of distribution:
Weakness in leaders for the move to the downside to drag them down:
- BTC - this is just done for (under prev supp, under 20DMA):
- Oil - driver of the reflation trade - maybe a head fake out of the wedge then to the bottom:
- Transports - heart of the economy:
- Financials - Very possible to break down:
- Small caps - under the 20W:
- Euro - also keep eyes on this breaking down or not... will be a big clue:
- Robinhood IPO (
HOOD) - remember Coinbase IPO and Bitcoin? Same thing applies here (especially with conjunction with tech earnings). Jul 29.
- VIX seems like it will let some hot air out by then:
As of now, it would appear that next week will present a most opportune entry for short.
You don't actually need to get the absolute top either, as long as you understand what is coming.
Either way, I am positioned for a move to the downside. Will it be the big one? Time will tell.
GLHF
- DPT
- For me there is no question that there will be a major correction in indices in the near future (by EOY - Q1 2022). There is also no question for me that it will occur before interest rate hiking by the Fed (if they indeed raise them). It is just a matter of getting the right entry and getting the prize.
- Don't be excited by daily fluctuations (choppy markets signal tops and precede bear markets). Big rips are caused by negative gamma only, not actual bull interest, despite what media or inexperienced trader crowd is blaring. Keep conviction, track the fundamentals, and watch the smart money.
- Something I am watching are divergences in market breadth and the index.
- Lesser corrections seem to be preceded by clear market breadth divergence:
- Major corrections seem to be preceded by bear flag type patterns in market breadth as indices peak to ATHs - this is very common:
- Nasty ones where the lower MAs (20D & 50D) lead, but 100D and 200D are unaware:
This phenomenon occurs because investors are iteratively scaling out of risk, moving into more and more defensive assets. Currently it is FAANGM only pushing up the markets, but they are basically the last line of defense.
SP may be down 3% from the top, but had you been in the reflation trade, you are likely down 10%. Meme stocks or crypto... 50%. SP is not actually an accurate representation of the broader market. The indices are a lagging indicator, as MMs have interest in achieving pinning to certain prices for the options market. It will follow the flow of money in the end.
When market breadth (especially 100D and 200D) don't give fair warning, it makes sense for the corrections to be deep, as less opportunity to hedge. We are not quite there yet, and it would appear that smart money is hedged sufficiently (also looking at SKEW index). Right now it would be no surprises for institutional traders for a healthy correction (5-10%). The real shocker at this point would be the bear flag breakdown on market breadth setup, where BTD doesn't work.
We know where the trend is going to go, but how can we achieve granularity for a signal to enter short though?
- Since FAANGM is the last line of defense, we should probably look there for a clue - they all have earnings next week, which would be my bet for a selloff:
- AAPL - it could be topped, but probably better to wait until it shows more weakness (crosses 20D):
- TSLA - seems to be at LPSY of distribution:
Weakness in leaders for the move to the downside to drag them down:
- BTC - this is just done for (under prev supp, under 20DMA):
- Oil - driver of the reflation trade - maybe a head fake out of the wedge then to the bottom:
- Transports - heart of the economy:
- Financials - Very possible to break down:
- Small caps - under the 20W:
- Euro - also keep eyes on this breaking down or not... will be a big clue:
- Robinhood IPO (
HOOD) - remember Coinbase IPO and Bitcoin? Same thing applies here (especially with conjunction with tech earnings). Jul 29.- VIX seems like it will let some hot air out by then:
As of now, it would appear that next week will present a most opportune entry for short.
You don't actually need to get the absolute top either, as long as you understand what is coming.
Either way, I am positioned for a move to the downside. Will it be the big one? Time will tell.
GLHF
- DPT
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One more thing to watch:China markets always precede US markets (since 08):
This divergence doesn't last long, watching for further decline in overseas markets
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Now we have highest bullish asset allocation ever, lowest bearish asset allocation ever, highest margin debt ever.Trade active
Breadth once again declining:Trade active
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CN50 vs SP: Trade active
China's Credit Impulse is set to have the largest YoY fall on record. It's going to pull equities with a slight lagTrade active
Interesting stat:"With the index down less than 1% as of yesterday 10% of S&P 500 stocks are down at least 20% and 34.5% are off by 10%." - Andrew Thrasher
Selectivity (Breadth) at Major Market Tops by Paul Desmond IFTA presentation:
Top Day on Average: % Stocks @ New Highs: 5.98%, % at or <2% of New Highs: 16.88%, % Off 20% Or More: 21.97%, % Off 30% Or More: 10.54%
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Timeline of Risk-off under the indices:Only a matter of time
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