I have very fond memories of time spent in the Fidelity Chart Room, from discussing the merits of contrary opinion with teams of financial advisors to teaching student investment clubs about the value of technical analysis. But one of my favorite “behind the scenes” moments came in 2009.

You see, much of the Fidelity Chart Room consists of wall-sized paper charts telling the history of the financial markets through the language of technical analysis. (Yes, I have such positive memories of time spent with paper charts that I basically turned my home office into a miniature Chart Room!) Back in 2009, the S&P 500 had broken back below 1,000 as investors grappled with the realities of the financial crisis. Stocks were breaking support and the charts went from bad to worse seemingly every day. The downturn was so severe, in fact, that some of the paper charts in the room had to be reprinted because the price had gone below the lower end of the printed price scale.

That’s right, the market literally went off the bottom edge of the paper. Our Chart Room team had to reprint entire walls of the room to adjust the scales to accommodate the most recent bearish price action. Talk about a fantastic piece of anecdotal evidence, when the Chart Room has to be rescaled due to bearish price action.

Soon after, the 2009 low was in place and the market began to rally. But I never forgot the lesson that extreme price movements to the downside, despite how painful they can be during the moment, have always returned back to new highs. Sometimes it has taken longer than other times, but, 100% of the time the market has indeed recovered.

ChartCon 2022 is happening in less than two weeks! This week, I spoke with Marc Chaikin about his expectations between now and year-end 2022 for equities. I also chatted with Joe Rabil, Julius de Kempenaer and Bruce Fraser about their “Sector Deep Dive” presentations. We have so many ideas and perspectives to share with you, and you don’t want to miss this rare opportunity to learn from some of the top names in technical analysis! Sign up today.

So when I see the AAII Survey get incredibly bearish, with over 60% of respondents saying they are bearish on the US stock market, I have to acknowledge two things; 1) the market is most likely going lower for now, and 2) the market is eventually going to make new all-time highs again.

The AAII bearish reading has reached 60% two times already in 2022, in April and June. While the bearish reading in June lined up well with the June market low, it’s worth noting that the April 60% reading occurred in the midst of a downturn. So just because the indicator hits 60% does not guarantee an imminent bottom.

We can also look at the spread between bulls and bears (bottom panel), which shows bears outnumbering bulls by about 43%. While this is the lowest reading for the last five years, we have to remember that indicators like this can and do get much lower.

Let’s bring in more data and see what we can learn.

How often have we seen over 60% bears in the AAII survey, along with a spread of over 40% between bears and bulls? Going all the way back to the 1987 market crash, this has only happened two other times: in 2009 and 1990.

In 2008-2009, you’ll see that the AAII bearish reading first reached 60% in early 2008. The indicator showed consistent readings around that level for another year before the ultimate bottom in 2009. 

In 1990, it was less than four months between the first 60% bearish reading and the ultimate bottom in prices. Note that, in 1990, the S&P 500 stopped right at the 150-week moving average before moving higher. In 2008, the bounce off the 150-week moving average was the first step of multiple painful steps lower.

In both 2009 and 1990, the spread between bears over bulls eventually reached over 50% at the market bottom. So, based on that simple analysis, we may not be at the market bottom just yet.

So the good news is we’ve seen AAII readings lean even more bearish than current levels. The bad news is the most recent example of this pattern, 2008-2009, saw the market move materially lower after the initial bearish signs were registered.

My conclusion: this downturn may be just the beginning.

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my YouTube channel!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication.   Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

When markets across the world and all asset classes are dropping, it’s time to put things into (international) perspective and see if any alternatives to US stocks are available.

I always keep an eye on this Relative Rotation Graph, which holds a group of international stock market indexes and plots them against the Dow Jones World Index.

The S&P ($SPX) is slightly hidden behind the tails of the Brazilian Bovespa and the Australian All Ordinaries indexes. The small chart highlights the rotation for $SPX over the last five weeks. It reveals that, in this universe, the $SPX tail is the only one on a negative RRG-Heading. With the US making up almost half of the benchmark, many other markets in the universe must rotate in opposite directions. This is exactly what we see happening on this RRG.

Looking at the graph above, there are three markets that stand out in a positive way. They are the three tails inside the leading quadrant: Brazil ($BVSP), Indonesia ($IDDOW) and India ($CNX500). With US stocks sinking hard now, these rotations are becoming more and more pronounced.

Brazil

The $BVSP Index is nowhere near its most recent summer lows (95000). Instead, this market is pushing against a double resistance level offered by the falling trendline, coming off its 2021 high, and the level of the most recent high (August) in the area around 11500.

After two years of relative weakness, the relative strength for $BVSP vs. the DJ World index and, therefore, the S&P 500, is now shooting higher,

India

The second tail inside the leading quadrant is for the Indian $CNX500 index. Instead of challenging its summer lows, this market is also pushing against overhead resistance, sending relative strength rapidly higher.

Looking at the RRG-Lines, the $CNX500 index is already in a relative uptrend vs. the DJ World index since August 2020, when both RRG-Lines moved above the 100-level. Since then, the JdK RS-Momentum line has dipped a few times below 100, causing a few rotations completed at the right-hand side of the RRG without pushing the tail into the lagging quadrant. Underscoring the strong relative trend, the recent acceleration of relative strength is giving Indian stocks another positive push against the rest of the world, and certainly against the S&P 500.

On the price chart, $CNX500 has managed to take out the falling resistance line and is now challenging overhead resistance coming from the 2021-2022 peaks. Breaking above 16000 would push this market to new all-time highs and unlock more upside potential.

Indonesia

The big chart above shows the $IDDOW pushing against an almost five-year-old overhead resistance barrier. Since the end of 2021, this market has started to outperform the world index and, very recently, managed to break above the most recent peaks in relative strength, giving the relative trend another boost. This recent push in relative strength is causing the RRG-lines to curl back up again, and it is bringing the green JdK RS-Momentum line above 100, pushing the tail back into the leading quadrant.

The smaller chart is the monthly chart of $IDDOW and shows how important that overhead resistance level is. Once that breaks a lot of upside potential will be unlocked.

The US Dollar

For a long time, the strength of the US dollar made it less interesting for US-based investors to look at foreign stocks. Investing in foreign stocks by default means exposure to foreign currency. And when the US dollar is getting stronger and stronger against pretty much all currencies around the world, that creates a drag on any exposure to foreign stocks.

This can be seen very well when you chart the various ETFs that offer exposure to these foreign markets. For the three markets charted above, these are EWZ for Brazil, INDA for India and EIDO for Indonesia. These ETFs are quoted in USD, so they do not represent the actual buying and selling in those specific markets, as these indexes will be multiplied by the USD exchange rate for the local currency.

That is why I never look at the charts of these ETFs to analyze trends or mark support and resistance levels. For that, I use the actual index chart. But these ETFs are great instruments to create exposure to foreign markets when needed.

The recent relative strength in these indexes is so strong that they are now countering the drag coming from the strength of the US dollar and sending their relative strength lines for the ETFs vs. SPY upward.

All of a sudden, a few of these foreign stock markets are becoming interesting alternatives for US investors, as long as the current slump remains in play.

#StaySafe and have a great weekend, hope to see you again next Tuesday for a new episode of Sector Spotlight.

–Julius

On this week’s edition of StockCharts TV‘s The MEM Edge, Mary Ellen reviews areas that are withstanding the downtrend in the markets, as well as what’s driving price action elsewhere. She also shares why the poorest performers this week may have further downside.

This video was originally broadcast on September 23, 2022. Click on the above image to watch on our dedicated MEM Edge page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of The MEM Edge air Fridays at 5pm PT on StockCharts TV. You can view all previously recorded episodes at this link. You can also receive a 4-week free trial of her MEM Edge Report by clicking the image below.

On this week’s edition of StockCharts TV‘s StockCharts in Focus, Grayson discusses the importance of a daily market review routine and demonstrates how two specific ChartLists from his own account fuel his personal process. You’ll learn how to create and organize market review lists of your own as Grayson describes the reasons behind his particular chart setups.

Plus, we’ve made both of these ChartLists available for you to save to your own account at the links below:

Grayson’s Daily Market Evaluation ChartListGrayson’s US Equities ChartList

This video was originally broadcast on September 23, 2022. Click on the above image to watch on our dedicated StockCharts in Focus page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of StockCharts in Focus air Fridays at 3pm PT on StockCharts TV. You can view all previously recorded episodes at this link. You can also receive a 4-week free trial of her MEM Edge Report by clicking the image below.

The market has turned for the worst in recent weeks and continues to fall in a bear market fashion.

Most of our portfolio strategies are holding more than 50% cash, some are utilizing inverse ETFs, and in my discretionary trading service, we are largely in cash. We are looking for profitable opportunities to deploy dry powder.

One of the areas we are watching is the biotech sector, represented above by the iShares Biotech ETF (IBB) or AKA “Big Brother.” The biotech industry is often considered risky, since biotech companies, especially in the small/micro-cap sector, are often speculative, and individual stocks can suffer vicious losses. Yet many areas of biotech show incredible promise, including regenerative medicine, gene therapy, genomics, new advances in treating cancer and autoimmune disorders, to name just a few. 

IBB should be on your shopping list for a few reasons:

1. (IBB) “Big Brother” is one of our Modern Family members and is trading well above the June lows while the indices tested them on Friday — we call that relative strength.

2. Biotech received a $2 billion boost from the US government earlier this week.

One of the goals is cutting cancer deaths in half in the next 25 years.The outcome of this government biotech initiative is unknown, but can only be seen as a positive for the industry.

3. IBB is sitting at an interesting pivotal support level.

IBB closed Friday over 115.Next key level to clear and give us a good risk point for entry is 118.

We are monitoring the biotech sector for a near-term rebound because of rising worldwide demand for medical advancements, aging populations and new government backing for research. 

For more information on how to invest profitably in sectors like biotech, please reach out to Rob Quinn, our Chief Strategy Consultant, by clicking here.

Mish’s Upcoming Seminars

ChartCon 2022: October 7-8th, Seattle (FULLY VIRTUAL EVENT). Join me and 16 other elite market experts for live trading rooms, fireside chats, and panel discussions. Learn more here.

The Money Show: Join me and many wonderful speakers at the Money Show in Orlando, beginning October 30th running thru November 1st; spend Halloween with us!

Get your copy of Plant Your Money Tree: A Guide to Growing Your Wealth and a special bonus here.

Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

A business cycle is about 6-7 years – where are the indices now and what should you watch for? Mish discusses this question in this appearance on Fox’s Making Money with Charles Payne.

Mish discusses how the Fed needed to be more aggressive, as they now have more to raise this year, with a panel on Coindesk.

See Mish’s latest article for CMC Markets, titled “Our Go-To Trade Indicator Post-Fed Meeting“.

Mish discusses price, momentum and market psychology in this appearance on Business First AM.

ETF Summary

S&P 500 (SPY): At least held June lows, for what’s it worth. 362 support, 371 resistance.Russell 2000 (IWM): Held June lows; 163 support, 170 resistance 170.Dow (DIA): Broke June lows-harbinger? 292 support, 300 resistance.Nasdaq (QQQ): Held June lows; 269 support, 280 resistance.KRE (Regional Banks): Relative outperformer holding the 6-month calendar range high; 60 pivotal.SMH (Semiconductors): Held the 6-month calendar range low, making 191 pivotal.IYT (Transportation): Transports unhappy, unless Friday’s gap turns out an island bottom.IBB (Biotechnology): 112 support, 118 resistance.XRT (Retail): Held the 6-month calendar range low; 55 support, 60 resistance.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

At its low on Friday, the Dow Jones closed below its June 17 low of 29,653. The S&P got within 11 points of its June low of 3636. The NASDAQ held above its June 17 low but still saw deep losses. All adding up to what? Buying opportunities, especially for those of you who think longer-term. And for those of you who have little tolerance for risk? Well, you should do fine as long as you stay disciplined.

For example, as you can see in the chart below, the S&P touched 3636 on June 17. At today’s low, the S&P got to within 11 points of that June low. On the flip side, the most recent high of 4325 on August 16 is now 18.5% above today’s low. Do I expect the S&P to get back to that 4325 level anytime soon? No. But I do like the outsized upside to downside reward to risk at current levels.

Note also in the above chart the RSI of 28.90 and stochastics close to zero, both flashing extreme oversold levels. In fact, look how the S&P bounced every time the RSI got down to or below the 30 level over the past year.

This is where discipline comes in. If we know the June 17 low of 3636 represents KEY price support, then we should be able to keep any losses to a minimum; i.e., a move below that level means it’s time to exit long positions for those with less risk tolerance. For those who care more about the long-term, you could be looking at some great opportunities — i.e., stocks that could make sizable moves — once the market settles down.

For example, look at the chart below on Advanced Micro Devices (AMD), a company that has continued to reiterate its financial strength and has fallen 60% since its November 2021 high. Do I think AMD is going to move back to that all time high any time soon? Of course not. But do I think that, over time, AMD could increase by 50%? I do. What if it takes a year to get there? So what? How many investments can you make that might produce a 50% return in a year?

This really is one of those rare times where you can have your cake and eat it too. There’s not much downside risk at today’s level on the S&P if you’re a short-term trader and keep a tight stop at that June 17 low on the S&P of 3636. If you’re a longer-term thinker, you’re getting a heavily discounted market. And if you’re looking to reduce risk even further, consider taking a partial position at today’s levels and adding on any further pullbacks, because,as we’ve seen time and time again, over time, the stock market produces tremendous gains.

In the meantime, if you would like to get access to timely and highly informative market insights from our Chief Market Strategist Tom Bowley, just click here and you will receive our EarningsBeats Digest every M, W and F FREE OF CHARGE! It’s a MUST-read!

At your service,

John Hopkins

EarningsBeats.com

It was another tough period for the markets, with the S&P 500 posting its 2nd consecutive week of a 4.7% decline.  Both weeks posted above-average volume as investors fled stocks amid signs that the Fed will continue to quickly raise rates, despite the real possibility of leading the U.S. into a recession.

Events globally are adding to anxiousness, with economic activity declining in Europe while a surging dollar is hitting already-weakened emerging economies. Russia’s implication that they may use nuclear weapons against Ukraine has also rattled nerves.

At this time, U.S. stocks are in a severe short-term downtrend that has put the markets into an oversold position similar to mid-May and mid-June. Both of those times, the S&P 500 staged a rally back up to key moving averages as buyers came in on the dip.

DAILY CHART OF S&P 500 INDEX

Things are different this time, however, as last week’s selloff puts the S&P 500 perilously close to breaking below its June lows. This 3636 level is widely viewed as the next area of possible support, and a break below that would likely spark further heavy selling, as it would signal that buyers have gone away. However, if the markets are able to find support at the June low, we could experience a sharp rally.

As for what could possibly drive the markets to find support at current levels and trade higher, next week, there will be no less than 15 appearances by Federal Reserve officials, including 2 separate occasions with Fed Chair Powell. Any hint of that the central bank may consider taking their foot off the pedal, with a lower percent hike at their next meeting, would certainly help.

Also up next week are 2nd-quarter GDP numbers, as well as key inflation data, with the August PCE Price Index due. Lower-than-anticipated numbers for either of these data points could also help bring back investors’ hope. Judging by the May and June rallies from an oversold position however, oftentimes it’s simply a lack of bad news that will bring buyers and push the markets higher.

In the daily chart of the S&P 500 above, I’ve circled recent periods when the stochastics were oversold, which preceded a rally. Longer-term, however, the markets are in a confirmed downtrend, and any possible rallies should be viewed as short-term in nature.

While the current market conditions may be painful, the good news is that, when the markets stage a longer-term bullish uptrend, it will provide investors a tremendous opportunity. The beginning stages of a new bull period are historically the most profitable and from my work, there is reason to be optimistic that we may be closer than many think to that beginning stage.

For those who would like to uncover how the markets are currently setting up to trade sideways on their way to going higher, take a trial of my MEM Edge Report for 4-weeks for a nominal fee. You’ll gain immediate access to my recent reports as well as Sunday’s update report that highlights similar periods to now for historical precedence, as well as what to be on the lookout for going forward.

On this week’s edition of The MEM Edge, now available to watch on demand at StockChartsTV.com and the StockCharts YouTube channel, I review areas that are withstanding the downtrend in the markets, as well as what’s driving price action elsewhere. I also share why the poorest performers this week may have further downside.

Warmly,

Mary Ellen McGonagle, MEM Investment Research

The week that went by remained rather contradictory in nature; however, let’s consider if this statement holds if we look at it from different perspectives and different timeframes. The markets certainly remained highly volatile, as they reacted, in turn, to the global market reactions to the 75 bps rate hike by the Fed on Wednesday. There are no second doubts about the kind of volatility that we witnessed this week. However, on the weekly time frame charts, it is just one more week of consolidation near the upper edge of the trading range, with the breakout getting just delayed! The markets found themselves having oscillated in a 627.65 points range; despite this, the headline index NIFTY ended with just a loss of 203.50 points (-1.16%) on a weekly basis.

 From a technical perspective, the 50-Week MA levels are in focus again. The NIFTY has delayed its breakout from the falling trend line that begins from the lifetime high point of 18600, which joins the subsequent lower tops. The NIFTY has closed below this trend line pattern resistance; this makes the levels of 17700 a significant resistance point for the NIFTY. However, the focus is on the lower edge; the 50-Week MA is currently placed at 17125. This level is expected to play out as crucial support for the markets on a closing basis. That means that any major slip below this level on a closing basis will invite incremental weakness for the markets.

While we looked at the technical structure of the chart, we need to keep a few data points in mind as well. FIIs have been shorting the markets; as per the derivatives data, net shorts are being added in the last three sessions. As of now, the markets sit with large amounts of shorts in the system. The coming week is likely to see the levels of 17500 and 17650 acting as resistance points, while the supports come in at the 17100 and 16920 levels.

The weekly RSI is 53.71; it remains neutral and does not show any divergence against the price. The weekly MACD is bullish and above its signal line.

The pattern analysis of the weekly charts shows that the NIFTY failed to achieve a breakout above the major pattern resistance that comes in form of a falling trend line. This trend line begins from the lifetime high levels of 18600 and joins the subsequent lower tops. The NIFTY has slipped near the 50-Week MA, which presently stands at 17125; this level is expected to act as important support on a closing basis.

Regardless of the talks around us concerning fear of recession, the extent of the possible decline in the markets, and the kind of panic reactions the current decline may trigger, we need to approach the markets with a sane mind. It is strongly recommended that one not resort to blindly shorting the markets, given the extent of the shorts that exist in the system. On the other hand, so far as making purchases is concerned, one will need to stay highly selective in approach. While following the basics, it is strongly suggested that the highly leveraged positions must be avoided and overall exposures should be kept at modest levels. A short-covering from the lower levels cannot be ruled out as we head into the monthly derivatives expiry week. A cautious view is advised for the coming week.

Sector Analysis for the Coming Week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

The analysis of Relative Rotation Graphs (RRG) continues to show the NIFTY Financial Services, BankNifty and PSU Bank indexes placed in the leading quadrant while maintaining their relative momentum against the broader markets. These pockets are likely to relatively outperform the markets. The Midcap 100 and Realty Index are also inside the leading quadrant; they too may outperform, but they are also seen loosening up a bit on their relative momentum.

The NIFTY Consumption, FMCG, and Auto Indexes continue to advance further inside the weakening quadrant.

While NIFTY Pharma continues to languish inside the lagging quadrant, the Energy, Media, Infrastructure and PSE indexes also remain inside the lagging quadrant. However, they also appear to be improving their relative momentum while staying inside this quadrant. This holds true for the IT Index as well.

The NIFTY Metal index continues to hold firm inside the improving quadrant.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

If this was a market with “normal” levels of liquidity, with the current level of fear and its oversold state, we would likely see a potentially tradeable bounce back in prices of some sort fairly soon. But it’s not a liquid market, thanks to the Federal Reserve.

Of course, even in its illiquid state, stocks will bounce back at some point. As I point out in the sections below, multiple indicators are now at levels which are associated with market reversals. Unfortunately, the odds of a lasting rally are low. And a reversal of note is unlikely unless certain things happen first.

Certainly, there are many intangibles at the moment which could cause unexpected positive vibes, such as a sudden and lasting peace in Ukraine, Mr. Powell feeling remorseful and calling the whole rate hike thing off, or the sudden discovery of an everlasting energy source which can double as food and which will be made immediately available free of charge to the entire world without any strings attached forever. 

Yeah.

It’s the Fed. And Russia. And China. And Hurricane Season is Heating Up. And the Election is Getting Close. And Blah! Blah!

Fear is high, as are just too many things that can go wrong at the moment. And concerns about geopolitics and natural disasters are valid. But, at the end of the day, in the markets it’s all about liquidity. And with the Federal Reserve on the warpath, investors will have to think long and hard about taking chances on the long side for a while.  This is due to the increasingly scarce amount of money in the system, aka liquidity, with which to trade stocks.

Last week, I noted that there was enough fear in the air to deliver some sort of a bounce. I also noted that “with enough fear in the air, nimble traders could make a go at any rally. But the reality is that any bounce may be cut short once the Fed delivers its next gut punch after its upcoming FOMC meeting, scheduled to end on 9/21.”

And what a gut punch it was, with the Fed not only raising the Fed Funds rate to a top range of 3.25% via a 75 basis-point increase, with the exclamation point being they aren’t likely to stop until they raise rates to 4.6%. As a result, stocks sold off quite violently.

All of which brings me to the real question for the moment: with enough fear in the air and with the market clearly oversold (see below for details), is there enough liquidity in the system for a bounce to actually materialize?

Rising Fear

Aside from the geopolitical and economic concerns, there are plenty of market gauges to keep an eye on

The widely quoted CNN Greed-Fear Index is now trading in the extreme fear region, hovering around 20The CBOE Put/Call Ratio is above 1.1, and The CBOE Volatility Index is back above 30.

All of these sentiment indicators are pointing to fear overtaking greed, which is usually when down trends reverse, even for short periods of time. Unfortunately, this rise in fear is coupled with a bit of a wrinkle.

Shrinking Liquidity Persists

Market rallies require a simple ingredient; money that’s willing to take a chance on the train wreck that’s left after a major decline. But money is understandingly cautious in the aftermath of a big selloff.  As a result, there are three stages which the market generally passes through during a recovery.

To begin, the sellers have to be exhausted. Only when there is nothing left to sell with the buyers reappear. Then, the next stage of a rally comes from short covering. That’s when short sellers start to buy back the shares of companies they borrowed and sold in the hopes of buying them back at a lower price and pocketing the difference between the higher price where they sold the borrowed shares and the price after the decline. If the short covering rally is credible enough, the next wave of higher prices comes from the real buyers. 

The summer rally in 2022 never reached the stage where buyers were fully convinced that the risk-benefit ratio was in their favor. As a result, it failed miserably after the short covering was exhausted.

The problem with the summer rally, and the current market, is that the Fed is taking out $95 billion from the financial system per month these days. They call it qualitative tightening (QT). They do this through the sale of treasury bonds and mortgage-backed securities on their balance sheet, which they bought when they did the reverse process during COVID – qualitative easing (QE).

The Bond Market Perspective

Three bond market charts give us a sterling picture of the liquidity situation. First, we see that the U.S. Ten Year note yield (TNX) has broken out above 3.75% and may be headed for 4% (and perhaps higher) at some point. Much of that rise in yields is the result of the Fed’s bond selling for its QT process.

Next, let’s look at the U.S. Two Year Note yield (UST2Y), which is now well above 4%. Again, this is a reflection of the Fed’s QT-related bond and note selling.

Finally, we look at the effect of QT on liquidity by reviewing the chart for the Eurodollar Index (XED). Eurodollars are dollar deposits in foreign banks that big money players use to make transactions which require rapid settlement. Some of the big players that use the Eurodollar system include trading houses and big hedge funds. Whenever they have extra money, they park it in Eurodollars so they have easy access and can make things happen fast.

When XED falls, it’s because big money players are using the money they would put in their Eurodollar slush fund to pay their bills. And that means that they can’t trade stocks at the same level that they normally would. Since XED is falling while bond yields are rising, it’s not difficult to conclude that the bounce in stocks may take a bit longer than usual to materialize. Note the close correlation between the rise in VIX, the fall in XED and the decline in SPX.

It’s also important to note that both TNX and the 2-Year Note yields are trading at or above their upper Bollinger Bands. Moreover, the 2-year note yield is extremely overbought, as its RSI has been above 70 for at least two weeks. That type of setup often precedes a reversal. If that happens, then we may get a small reprieve in stock prices.

Check out my recent Your Daily Five video on how to adjust your trading based on liquidity.

What’s the Bottom Line?

Three things have to happen before we get any kind of bounce:

The selling has to stopShort sellers have to cover their shorts aggressively enough to entice buyersBuyers have to take the bait and jump in aggressively

Until those three events occur, the odds of a meaningful rally are low. A second-best outcome would be that stocks start to move sideways.

When is it likely to end? When the Fed steps off the market’s throat.

Welcome to the Edge of Chaos:

“The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder.” – Complexity Labs

Contrarian Bullish Signs Appear in NYAD and VIX

As I noted above, in order for markets to bottom, after the selling stops, short sellers follow by covering their shorts. Finally, buyers come in.

In the current market, as I describe below, short sellers have been relatively quiet in comparison to actual real sellers of stock (former buyers and holders), at least based on the S&P 500 (SPX).

This is illustrated by the general rise in the Accumulation Distribution (ADI) indicator, a reliable measure of short-selling activity, in comparison to the On Balance Volume (OBV), which is more indicative of real buying and selling.

Meanwhile, SPX continued to slice through support levels, as the very important 3900 area gave way easily and the selling mounted.

On the other hand, the New York Stock Exchange Advance Decline line (NYAD) is now officially oversold, with the RSI near 30 and the line itself trading well below the lower Bollinger Band (green lower line). What usually follows this type of setup is a move back inside the band – before the market decides what to do next.

At the same time, reinforcing my analysis above, VIX is very bearish (nearing a contrarian bullish level). Unfortunately, as the composite NYAD, SPX and XED chart shows, XED is nowhere near bullish, which means that even though fear and technical developments are ripe for a rally, money to fuel the rally may have become very scarce.

The Nasdaq 100 index (NDX) did no better, as it got crushed further after failing to bounce back to 13,000.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition – Get Your Copy Now! Now also available in Audible audiobook format!

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Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.