Chart Wars: S&P 500

The S&P 500 Index failed right at the taper line and before reaching the 1929-2000 top trendline. There are three almost parallel lines formed after the 2009 low, the top taper line, the support line and the midpoint. The S&P 500 is coming up on the midpoint line. Prior QE-related selloffs in 2010 and 2011 were larger percentage-wise or went to the midpoint line. The selloff in 2015-2016 took much longer and was shallower as a result. The 2018 correction started lower and went lower. 

The strongest case I can make for at least reaching the midpoint area is that stocks are coming from. They reached the taper line and the 1929-2000 line. Fueled by rampant speculation and central bank support, stocks went almost to what the chart says is their most extreme high possible.

Long story short, there are two clear possibilities now. A rally up to a higher resistance area such as 4500, or a breakdown to the sub-4100 area. On the side of a rally is the breaking of short-term resistance levels. There's also the "oversold" indicators and growing bearish sentiment, but sentiment indicators become near worthless in these conditions because the bottom is unknowable. Markets crash in these conditions. On the bearish side, there's a bear flag formed. The slight violation into Friday's close might be a bull trap. 

That Apple was a massive portion of that move and still barely off its all-time high, also tilts bearish in my opinion. Apple would likely go to a new all-time high if the market were to rally hard and I don't see that happening. It's more that the market is now setup nicely for an "inverse" of the past three months, something I expected a couple of weeks ago, but may finally come to pass: the fall of the tech giants. ARKK could plunge into the abyss on a broad bear move, but I think it'll be stocks like Apple, Google, Tesla and Amazon behaving more like Netflix, that will form the final phase of this bear mauling.

It is said that the markets like to make everyone lose, so what is the outcome that would cause the most pain? Probably something like this: a move abouve 4500 that would hammer the bears looking for a breakdown now, while sucking in all the bulls who will have FOMO wishing they bought earlier. They would be screaming about new all time highs and if 4500 is violated, many bears would worry they are right. It's worth noting that if the S&P 500 failed at 4500 and rolled over, the target for this pattern is the same. It would have a smaller right shoulder.

Looking more granular, the weekly candle is bullish. The one exception was in 2015. The first hammer candle was a fakeout:

Now:

To conclude: a bullish rebound wouldn't be the end of a bear market. Far from it. The Federal Reserve is still doing QE at full-blast, yet stocks have performed this way. The entire taper thesis of falling oil and sliding equities has not yet started. The entire move to this point is a psychological one, a pricing in of a coming taper and rate hikes.

All of the other rallies had one of two things in common. One, the taper was finished. The May 2010 flash crash, summer 2011 swoon, 2014-2016 slide in commodities and then stocks, the 2018 QT correction, the March 2020 panic, none of those occurred with Fed support ongoing. Two, the most recent reversals came because of a Federal Reserve policy reversal. The 2016 decline ended with the Shanghai Accord, the 2018 slide stopped when QT ended, but the markets were weak. The Fed did a "stealth" QE with reverse repos in September 2019 and even that wasn't enough. I don't need to rehash 2020-2022. 

The bulls might produce a Pavolivian echo rally. They may buy the dip as if they had Fed support. It will fail assuming the Fed ends QE, because the Fed is going cold turkey. This correction occurred with the Fed providing 80-percent of peak QE. If the Fed is stupid (all evidence says yes), they might keep QE high into March, praying markets stabilize. Or they're going to have to stop the lying and actually taper down to $30 billion in purchases next month, which will be a 70-percent drop from their January buying. 

The wildcard in all of this is crude oil, which remains near 7-year highs. I believe their QE efforts are backfiring by lifting crude oil instead of stocks, setting markets up for a much bigger fall than necessary. Whatever bulls claw back in the days and weeks ahead will be added fuel for the next bear mauling.