Technicals Schmechnicals

I expected a bit more of a bounce in the equity markets given the Monday and overnight moves. There are a lot of bears in some corners of the market. Maybe it will develop over today or the days ahead.

My view is that we've entered Wave 3 though. Technicals will not matter once the decline sets in. I will be aggressively shorting any rips. For myself, if I miss the move down I expect, it will be a total failure. The rallies can be brutal, but in my opinion, the technical traders and day traders will be wrecked by what is coming. This is the "turn off the machines" time. One of those few "buy and hold" moments for bears. Unless the market crashes, I don't think bears who put on shorts in mid-August will need to cover until sometime in October or November.

Bear markets don't bleed lower. Some securities do, but when "assets" such as the euro and yen are making new lows day after day, something eventually snaps. Europe's consumers are going bye-bye once their energy bills reset higher or European governments will "hyperinflate" the euro with energy vouchers. It is obvious in foresight barring a surprise.

The bullish this morning: equities up, oil and natural gas down, copper up, crypto holding steady.

The bearish: bonds down, euro down, yuan down, yen way down. It is worth mentioned that China was hyping the brief, small bounce in the yuan caused by the PBoC cutting the FX reserve ratio. And then it was blown to smithereens overnight. The move they celebrated was followed by a move six times larger, taking the yuan to a new low. iFeng: 央行“降准”：外汇准备金率下调2个百分点，人民币应声飙涨，什么信号？ Chinese media won't hype the move lower, but the propaganda fail is a gut punch for anyone paying attention.

The week ahead for bears: new 52-week lows in Asian currencies, new low in euro coming? New low in long-term treasury bonds coming? New low in equities coming? If natural resources plummet, most importantly oil, it could shore up equity markets for a time.

Without other pieces moving into place, both a rise and fall in bonds strikes me as bearish here. A bullish rally in bonds probably comes with bearishness in equities and commodities, or both. A resumption of new 52-week lows will crater the U.S. housing market and accelerate the U.S. dollar rally. I have no positions in bonds at the moment.

Animal Spirits on the Line

Animal spirits are on the line. BTC has been lower before, but it is back at the 2017 high. The next support is in the $17,000 area and I expect that support will not hold.

The Bullish Fever is Broken

Always a risk of a final higher top, but the bullish fever has broken.

QQQ has the same wedge and premarket decline breaks its wedge too. Not as clean as crypto, yet.

ZB looks busted, but TLT still looks like it could be an inverse head-and-shoulders. I don't care how it resolves because I have no position. Up is ice and down is fire, the difference is important for choosing the best short targets, but otherwise immaterial for what I expect will be a big bear move no matter what.

Crude needs to crack for energy shorts to pay off. If it does and the stock market slides, that sector should deliver some outperformance for bears. Tech will also be in trouble if bonds sink again.

Ethereum Headed for Test of $1700

I notice many traders expected a pullback, but only 3 to 5 percent maximum decline. Could be the rally still has legs. I will watch crypto as one of several signals on that score.

Ethereum Tests Rising Wedge

Good Enough for a Top Call

If you're buying puts for October or later, the top is in as far as I'm concerned. Tesla was one of the few winners today among BigTech. Cryptos were down, ARKK barely up considering how the major indexes moved. You might not want to go all in on puts yet because the indexes can be funny. Apple hasn't filled its gap yet and I worry there could be a fakeout pop higher. Having said that, I also wouldn't be shocked if SPX is sub-4000 when the calendar rolls to September.

Money Making Charts for August

China always dumps bad news in August. The worst performing month for Chinese ETFs and emerging market funds is August. The EPS of the MSCI Emerging Markets Index tracks China's 10-year yield. The PBoC cut interest rates today because the Chinese economy is going down the tubes.

I'm not saying EEM is going to plummet right now, but it has no support. If this is all a bear market rally, the whoosh is coming.

Crude oil and copper are down. The crude ETF USO has busted support from the 2020 low (I moved it to coincide with the top). There's always a risk of a fakeout at this point, but bears should press their luck because the analogs are with them. If crude is going down, it's going down big.

The major indexes are all lower, with Nasdaq outperforming thanks to oil down, bonds up. Nothing significant there with the final leg of the rally still intact until it isn't. Finally, BTC and ETH both look like bear flags to me. They may be helpful signals for a market reversal.

Finally, two things to keep in mind. First, bull and bear patterns fail when they are contrary to the primary trend. Many a bear setup failed from 2009 to 2021. Short-term bullish patterns completed in June and July and delivered nice pops, but larger bullish patterns will not deliver if this is a bear market. If you see a bull setup that gets trashed early, you have an information advantage.

Second, sentiment becomes bearish in a bear market. I remember 2008 well. Many investors thought Bear Stearns was it. They were buying the dips. China was deteriorating with bad news rolling out as soon as the Olympics finished. There was a Barron's cover piece on Fannie and Freddie's troubles in late August 2008 and that's when I knew "the moment of recognition" was upon us. All along, there were bears like myself looking for much more and our numbers were growing. "Everyone" is bearish at the low, but we are a long, long way from the low. As I posted earlier, real selling hasn't kicked in yet. The herd is right most of the time. If the herd is turning bearish...

I believe this is a bear market rally, but the stock market could go higher because crude is down and long-bonds up. My thesis has been that markets will transition from, "Crude down, bonds up! Yay!" to "Why is crude still falling? Why do bonds keep rallying? WTF is going on???? GET ME OUT OF STOCKS NOW!!!" If I'm wrong, but it's a bear market, then a resumption of Jan-Jun 2022 kicks in. Bonds sell-off as inflation goes higher again. If I'm really wrong and there is no bear market, stocks will be the first to tell.

BTC Lower High Forming, ARKK Down

BTC is forming a potentially lower high. This is highly speculative, but in line with everything else. ETH is also holding near a major breakout/breakdown level. ARKK is down hard today. None of these are major moves, but in conjunction with SMH and XBI/IBB, this is all as expected when the market rally finally ends. Of course, these are early moves and could reverse in a day, but signals such as bullish percent make me think this could be a more significant turn. Contrarily, the best move here for bears who aren't all in might be a divergent spike up in price as signals such as bullish percent turn lower

The Stock Market is Body Positive

We've known for about six weeks that inflation was coming down because crude oil peaked and declined. Yet only this week will the average market participant, including many professionals, be confident in this reality. Go back to the setup for the market in the first half: commodities (most importantly energy) up, inflation up, rates up, stocks collapse. The setup for any sustained reversal was: commodities down, inflation down, rates down, stocks rally. Even though the technicals point to a rally running on its last fumes as I discussed this weekend, the fundamental setup is still positive for stocks. The CPI report this week should be much lower than expected, helping to fuel dovish expectations for interest rates. The CPI might come in a little hotter than expected because disinflationary housing data may not have kicked in yet. That's the key for shifting the core CPI onto a disinflationary path. The real turn in the markets won't hit until that signal triggers.

The Russell 2000 Index has already broken out. the Nasdaq and S&P 500 Index are poised to follow.

A break lower in crude oil will help fuel dovish thinking. I don't argue the details with experts in the natural resource sector, but they sound like they did in 2008 with comments in the spirit of "crude will never trade below $XX in my lifetime." It crystallizes the general thinking about inflation.

Will ZB follow my drawing?

Watching the yen this weak because "the Fed pivot" triggered the prior surge in the yen. This is the type of market where I expect a shocker squeeze could unfold.

Finally, the fact that the market is ralling on information available six weeks ago, combined with the technical signals discussed this weekend, tells me a reversal is as likely as follow through. A drop followed by a final high is one scenario that could drag out for a few days or weeks. If instead stocks go up first, it could be a "relentless" rally that gives bears a perfect short set-up for late summer and early autumn.

Final one for the bulls: Ethereum.

Update: Best Case for Bears Today

The best case scenario for bears today is a big miss on jobs. That should trigger a melt-up in stocks because the main pillar of the "it's not a recession" crowd has been employment. The Federal Reserve also cited employment as a reason not to slow rate hikes. Those arguments come crashing down if employment misses big. My only concern in that scenario is the market tends to process this information slowly. Stocks probably rip into the open because rate hike odds would tumble. This should spark the final move higher in the bear market rally. Commodities might rally too based on fewer rate hikes and bonds should rally. The yield curve might have another surge into deeper inversion. Even if it went on for a few days, bears who bought puts for September and October today would probably have decent profits by mid-to-late August. Best case though is a final run here because the market is primed to be stupidly bullish.

Another way that scenario plays out is one more vicious squeeze of the bears with a dip and then rip. NQ would test its support around 12900 and ES would test the low of the prior week range, before going back up.

A very strong jobs report would probably weaken bonds and strengthen the dollar. Eventually, trades related from that would play out. I'm not sure how stocks would react in the short-term. Probably up because that's been the general direction.

Finally, the jobs report is ulimately meaningless. It's one data point. Most likely the report will be within the range of estimates making it also somewhat meaningless for traders. All it will do is remove uncertainty. Instead of ultra-low volume as we saw yesterday, volume will surge as the market zooms towards its intended target. Only in rare situations such as we are in now can a jobs report act like a 2x4 across the face of investors, traders and policymakers.

BTC and ETH are hinting that markets want to run.

Jobs were almost double expectations. This is a macro disaster for stocks with yields surging and the yield curve inverting even more, should it hold. I never trust the first move though. Buckle up! Should be a wild day.

When Does the Bear Rally End and Ethereum Breakout

I give you a news item from July 2008. Cramer Declares The End Of The Bear Market

I am indeed sticking my neck out right here, right now, declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15….. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.

– Jim Cramer, last night (Wed July 30), on his “Mad Money” program on CNBC

The linked post is bearish, he was only noting Cramer's call. Notably, the same guy is temporarily bullish today: The Lows Of The Year Are In

The bear market is not over. That was simply chapter 1. We’re a long way from home. This is a tactical call for the next few months.

Ethereum broke out. This initiates what should be the final leg of the bear market rally.