November 19, 2018
Technical Event Model – Volatility modeling
Market backdrop provides a springboard for a dynamic trend. In the new millennium, themarket has traced out three previous peaks. Each of them occurred while prices were at an extreme – in the long term (L-T) resistance and L-T extreme low historical volatility measured by the Technical Event Matric.
Each top was preceded by a Technical Event #2 of TE #4 or both. Since the January 2018 peak on panic buying (TE#1) the S&P and all the other major indices, have reached a TE#4, a condition that leads to an expansion of range. For directional reasons I highlight below, the expansion of range will push off the most recent highs and L-T fixed zone resistance to project prices lower by another 10% before the end of the year. (See COT dates below).
Readings of %BB of implied or perceived volatility – CBOE’s formulas (VIX et al.) have a bearish connotation – suggest the recent increase in VIX will have to follow through. In the next chart, I had a look at the last three corrections in the “Trump Bump” era to find a similar pattern in 2018. What I found pointed to a correction at least as big as 2011 and 2015.
Some may say, that has already happened. Granted, however, any further increase in %BB-VIX on the monthly data would be a signal of a larger correction. One more in the scale of 2000-02 and 2007-09. But that is not our lone indicator.
Elliott Wave (EWT)
Many Technical factors lead me to conclude the markets in the USA are now entering a new cyclical bear market. When the markets do as they should, and that fits the scenario of a terminal move in the bull cycle, one concludes he has seen the end of the bull.
Most of the major indices ended with 4th wave horizontal triangles followed by measured moves to new highs, which peaked exactly to the tick of the measured move. Besides hitting the target right on cue, the decline from the high has traced out what is called an impulse wave, which is always in the direction of the larger trend. The market found natural support at the apex of the horizontal triangle, which fits EWT guidelines. And, all of which fits with the description of a top, a top of some proportions.
The intraday chart of the SPX outlines the clear impulse wave lower and the counter-trend A-B-C rally that rebounds into the typical .382-.618 area. What else is typical is that ratio area is also the price area from the low of wave 3 to the high of wave 4, as seen here.
While it may seem small, all babies must crawl before they can walk or run. So to a baby bear, needs its first short-term trend before it can have its intermediate-term trend or long-term trend and so on.
The Nasdaq and Russell have the same patterns.
Traditional Technical Analysis
I have long stated that the vast majority of institutions run price-based systems behind the scene and my nature they are pretty much all the same.
On a special note, what sets Contrary Thinkers apart from this majority is two factors. One is the use of volatility modeling as the context, the overreaching governing agent if you will. Two is the use of contrary thinking as part of that context. In other words to know there is no a direct economic benefit to owning shares unless it pays a dividend; and that everything else is a story and by the nature of a story it could turn out to be the truth or lye.
So, regarding the traditional, the 200-day moving average has turned lower. Going back over all the history of the S&P and Dow Jones, there is not one period when the 200-day ma has moved lower where a longer-term correction did not occur. The most recent example is late August 2015, which lead to six more months of consolidation. What this indicator gives up regarding efficacy at pin-pointing tops it makes up for in its perfect accuracy.
The above chart also points out the signals our “Fixed Strategy Zone” strategy uses to buy and sell signals. The SPX is failing to hold its breakout was the first sign of weakness. The market followed with a breakdown below the floor of the Strategy Zone, another sign of the marker failing. The SPX is now testing this area that should be new support (old resistance) and is holding. The next failure – three is a charm – should pick up a following of sellers.
Another key factor here it the deep oversold reading by RSI, extremes in momentum are followed by more momentum in the same direction.
The October decline produces a greater bearish surge in RSI than the free fall the SP had in the first week of February. That earlier decline leads to three more months of consolidation before it could gather itself for an advance. The sell-off in October was more radical as measured by RSI, which supports the outlook for lower prices over the next few months. Lastly, on the RSI, it is now at a bear market OVERBOUGHT reading.
Getting back to the point about that the vast majority of institutions run similar price-based systems behind the verbiage and that by nature they are much, all the same, that is their signal cluster with each other.
The %BB-Osc shown here would fit that similar strategy model, based on the popular Bollinger Bands. In the above chart going back to the turn of the century, there are five occasions when %BB failed to hold its breakout zone (>.7638). I high-lighted each event in the above chart including the long-term warning signal posted by %BB-Osc here in November 2018.
MarketMap change of trend dates (COTs)
Back in the September 12, 2018 issue of MarektMap-2018, I pointed out that the peak in November may be at a lower high than the peak we saw in October. That is the case thus far. Our map points to lower prices into the middle of December, which fits our other time cycle models.
Based on the long-term cycle, like the 29 years, the Map has referenced the following table of dates. Based on a primary peak being in place, I inserted only the secondary peaks followed by the next set of bottoms in the series.
If we have that secondary peak is in place November 7, 2018, it is an event like 1931, the next low should be on or about December 17-18, 2018, which fits the MarketMap™ Fractal seen on the left-hand side. The Decennial map here at the end of the year is flat coming out of November.
The market events that were set off by the mid-January peak regarding timing high and lows maintained their accuracy for the year and ran their course with the new high in September. While the new highs after January 2018 did not fit the scenario, prices are now below that level by 5 ½%. The new cycle of market-based events unleashed by the high pivot in late September fits Contrary Thinker’s bearish outlook. These cycle also contain geopolitical events that will cause financial distress on the system. This cycle also entails multiple long bar days in the coming 13 months that exceed anything we have witnessed today regarding percent change both up and down.
MarketMap 2019 is in productions now. The three big issues come out in mid-December, early January, and late January to give investment and capital management the ability to plan their year.
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