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Sell Signal On US Stock Market About as Good As It Gets

Today's breakdown below the one-month sideways trading range in QQQ is exactly what I have been looking for: Impulsive selling on high volume following a solid break below the 116 level. There is no such thing as a 0% failure rate on sell signals but this one is about as good as it gets, especially considering all the bearish developments in place leading up to today's breakdown. Today's sell-off has already wiped out over one month of trades (candles) as well as taking QQQ back down below the 2015 highs (i.e.- the recent breakout has failed with a potential bull trap scenario now in play).

 

Taking this and everything else that I've highlighted over the last several months, such as the recent extreme contraction in the Bollinger Bands to levels that have, without exception, lead to corrections of 5% or more follow every drop to this level for years, the odds strongly favor that today's sell-off is more likely just the beginning of a much deeper correction.

SPY Bollinger Bands Contractions Sept 9th

SPY Bollinger Bands Contractions Sept 9th

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Sep 9, 2016 1:32pm|Categories: Equity Market Analysis|Tags: , , , |8 Comments

8 Comments

  1. jameske September 9, 2016 1:39 pm at 1:39 pm

    @rsotc Randy, is this a buy gold scenario? As you know, I prefer going long than shorting. So, I looked at GLD compared to QQQ and it would seem so, but would be interested to hear your thoughts.

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    • rsotc September 9, 2016 2:24 pm at 2:24 pm

      jameske- Normally, one would think that this is a great time to buy gold (as a flight-to-safety trade as stocks sell off). However, assuming that my analysis is correct, putting the technicals aside, the same fundamental catalyst for this move down in stocks, which is the realization finally setting in that the Fed might finally hike rates, is the same thing that could put continued pressure on gold prices, and that is a rising dollar. I explained it in more detail recent in this post: http://rightsideofthechart.com/do-you-want-to-know-where-gold-is-going/

      Essentially, the logic is that as the chances of a rate hike increase (or we actually get a hike on the 21st), then that is bullish for the US dollar because our interest rates will increase relative to the others. In that post, I highlighted the inverse correlation between the dollar & gold, but also added that it has been an on & off correlation in recent years so it wouldn’t shock me to see gold rise along with the dollar. However, that’s the fundamental case. I’ve also recently made a bearish case on gold & especially the miners from a technical perspective & at this point, I still think the correction in the miners has more room to go in both price & time. If I had to choose between the two (fundamentals & technicals/charts), I’d choose the technicals hands down but when they both align, that’s even better.

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      • rsotc September 9, 2016 2:36 pm at 2:36 pm

        jameske- One other variable to consider: Although the correlation between the stock market & gold prices has been on & off both historically & in recent years, shifting from a tight positive correlation to an outright negative correlation, the correlation so far in 2016 has been a very tight positive correction. A couple of take-aways from that:

        1) Should that correlation continue, then a correction in stocks would also mean a correction in gold.

        2) The long gold/long stocks trade so far in 2016 could indicate that the same buyers of equities have also been accumulating gold, whether as a hedge to their stocks, should some financial crisis or stock market crash hit, or maybe simply as a momentum trade (people like to continue buying something as long as it keeps going up). However, the fact that margin balances are near all-time record highs tells me that IF the stock market rolls over & some serious selling starts to kick in that a domino effect of forced selling could kick in as a lot of investors that have been long both stocks & gold and will be forced to sell both to meet their margin calls (think 2008 when everything, including gold, was being dumped… much of that was forced selling from margin calls).

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        • pangblood September 9, 2016 4:03 pm at 4:03 pm

          @rsotc Randy, do you recomend closing out the GDX short the day before the FOMC meeting (given that the targets arent hit), or reducing exposure? I have been burned numerous times by these meetings, what are your thoughts? And have a great weekend

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          • rsotc September 9, 2016 4:09 pm at 4:09 pm

            FOMC announcement too far away for me to make the decision to proactively close out any GDX short before the announcement, assuming I’m still in the trade. Assuming that I am, it would depend on the charts. For example, let’s say that GDX is fairly close to one of my profit target while there is some potential divergence setting up on one of the intraday time frames, such as the 15, 30 or 60-minute charts, then I would probably close it out to avoid getting caught on the wrong side of a post-FOMC induced rip.

            Feel free to run the question by me again early that week (Monday or Tue Sept 19/20th) if GDX/NUGT is still an active short or if you short at the time if not.

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  2. jameske September 9, 2016 9:51 pm at 9:51 pm

    @rsotc hi Randy, whilst both GLD and QQQ both have been rising together recently, within that, there is an inverse correlation. It is visible on a daily chart going back several years One perspective on that is that money printing has lifted the dollar value of everything, whilst on the other hand, there remains an inverse correlation between the relative value QQQ and GLD. In other words, dollar printing creates a false correlation, whereas if one looks at the charts, where the dollars go remains a matter of investor sentiment. It is visible on the daily and weekly charts. Whilst very recently on the weekly charts you have GLD and QQQ rising together, consider the possibility that gold is rising right at the time when the market is topping. That is, early investors see that gold was very undervalued Since Q1 of 2016 GLD and QQQ have been rising together. But only GLD has been in a bear market beforehand. If the gold bear market has ended, is the rise in GLD a very early warning sign of a longer term bear market in the stock market. Compare the weekly chart of the Nasdaq Composite with Gold. The ~2000 high in the Nasdaq represents also the low in Gold. So, another view is that if this is the high in the QQQs then we are seeing the low in GLD right now! Which coincidentally on the weekly chart also looks like a massive bull flag.

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  3. joefriday September 10, 2016 10:45 am at 10:45 am

    Thanks Randy… agree more downside coming..as shown in my charts etc. posted above… one thing I will add, to the extent anyone values my opinion, is that I can see all asset classes being hit hard on this drop b/c cheap money has led to lots of borrowing & cross collateralization in various assets classes…incl. Gold, Bonds etc.. Thus, “If” markets continue to drop it could result in this cross collateralization having to be quickly unwound in a mad scramble to sell assets to cover margin calls etc… If I am correct, this will lead to one big continuing puke fest into the fall… my 2cents..now back to my corner.. 🙂

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    • oxienergie September 10, 2016 11:39 am at 11:39 am

      Your opinion is definitely valued. Thanks for sharing.

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