Bigger Picture

As I write this, Sunday night’s ES Globex session has opened by gapping down to meet the 2402-2405 target established intraday Friday, and then bounced back to unchanged. Is it a head-fake that will result in a relief rally, or a warning shot that will resume after filling the gap? Either way, Monday’s early close with its volume limitations may be among year’s the busiest and widest ranging.

There’s always a bullish case. There’s also always a bearish case. One tends to be more dominant, but their relationship is always in flux as price changes, because price levels and price action are a big part of either case. Recently, the bearish case has dominated. But is that relationship nearing an inversion point to create a buying opportunity? I’m not referring to valuation, which would be based on such inputs as fundamentals, intermarket comparisons, etc. Rather, from a technical perspective that is guided by observations of momentum, sentiment, and specific behaviors that can be associated historically with previous turning points.

When I asked whether a bullish setup may be *nearing*, I mean in terms of a couple of hours, or a couple of days. Meanwhile, that could be thousands of points below. We’ve been monitoring the development of my Complex Ascending Triangle topping pattern in April, and now all of its likely downside targets are met, with no signs of slowing.

I’m still concerned that the decline lacks capitulation. Such extreme sentiment is a necessary component to forming price extremes. But how much longer can the decline avoid becoming capitulative? My contemporaneous observations of excessive optimism have been a significant rationale for remaining bearish. Meanwhile, sessions have been losing a lot of ground: At its lowest point, in the past 6 days the Dow Jones has fallen 463, 679, 513, 77, 643 and 563 points. This decline may be only hours away from a capitulation low, but that could be a 1500-2000 point intraday capitulation session. So, *nearing* a buying opportunity can be very different in terms of price than in time.

By the way, I’m referring to a trading bottom, and not to a longer-term investment opportunity. Markets peaked at September’s end, and three months in decline is within the 3-4 month average of stock market corrections. That’s not a time limit for the decline, but the time frame does add credibility to an actual reversal attempt. Having said that, bear markets average a duration of 1-1/2 years, during which many reversals are attempted and fail. The current decline may be the beginning of a deeper, longer bear market.

Scroll back up to see the chart we’ve been monitoring since April, with my “Complex Ascending Triangle.” It is a topping pattern I discovered that occurs frequently among markets and stocks, among all time frames from intraday to weekly. It projects to a final or “terminal” extreme in the ongoing trend, at a 61.8% or 161.8% projection from two specific price points within the pattern (this instance reached the initial target).

More so, the pattern predicts — before its highs are even met — that the subsequent reversal will be aggressive, which it has been. Again, this pattern began forming more than 6 months before October’s highs, before any talk of tariffs or shut-downs. Additionally, retracement objectives and supportive influences complied with the typical 61.8% minimum objective (that “x” on the chart was placed almost 2 months before price arrived there). Extending lower can become a much longer and drawn out decline.

So, the current decline was not a recent creation. The market pattern had been working toward it for months before it appeared. Recall my posts nearly one year ago (Dec 26, 2017, Jan 3 2018) discussing the high-profile gift of stocks from Kim Kardashian to her husband Kanye West. This “contrarian alert” wasn’t expected to prevent optimism from rising to new extremes, and it didn’t, as January screamed higher. But then the market crashed into February, because of the pattern that had created the vulnerability, and not because of any catalyst.

As I write this conclusion, Globex is approaching midnight and ES is approaching the 2434 target created by its opening swing. Monday’s shortened, illiquid session could cut either way, triggering a squeeze or resuming the decline. Major trend reversals don’t generally form during expiration, but that doesn’t preclude bounces. Whichever direction your trading, be sure to have a stop at work — and don’t rely on Santa, his rallies, or his reindeer to affect direction.