The bounce yesterday in equities arrived at an appropriate point when stock indices are cross-referenced technically: channel support on the SP500 and key horizontal support on the Russell 2000:
Plus rising support on the Hang Seng – which has generated what could be a fake-out above the long term wedge followed by a breakdown (if it can break):So can all these indices break down, or are we to see another dip-buying v-correction?
On the above chart a positive RSI divergence was a reliable signal for a v-correction bottom. We do not have that yet, which suggests there should be another leg down of selling, even if shallow, where momentum wanes, if this were to be another v-bounce. This period into next Wednesday’s full moon is the likely window for this additional selling to occur.
However, beyond the prospects of a slightly lower low ahead, could this be the correction that does not produce another V above the 200MA, but forms a ‘true’ correction? I believe the clues are in what’s different this time compared to the previous corrections:
Breadth has made a lower low on the SP500 this time:
Breadth deterioration is notable on the Dow since the last peak, plus Vix divergence:
Nasdaq breadth has deteriorated sharply since the last correction:
Junk bonds double-topped at the last peak and have since made a lower low:
Recent deterioration in stock market internals has been a global phenomenon:
Source: GaveKal Kapital
The disconnect between global GDP trends and global stocks reached its greatest in the last couple of months:
And inflation expectations have dropped to the lowest since the 2011 bottom:
Source: Sober Look
By yesterday’s bounce in equities, NAAIM exposure had pretty well washed out, whilst conversely Investors Intelligence bears remain extreme at 15%. Put-call had reached a suitable extreme for a bounce whilst exhaustion signals are still largely absent. So, some case for a longer bounce here, and some case for the markets to continue downwards. However, note that the extremes in II, Rydex and Skew and the lack of fear spike in the Vix are at this point very mature and at every correction the odds increase that we see the true breakdown.
If we tie in the worst seasonal geomagnetic month of October, an earnings season beginning next week that should cement the disconnect between reality and valuations/projections, the ‘borrowed time’ clues post-solar-maximum (circa March), and the extreme positioning in gold and silver (which I believe are ripe for a short squeeze as/if stocks fall through support), then the case grows for this being the correction that becomes the breakdown.
Source: Market Anthropology
To sum up, there has been a broad deterioration over the last 3 months that suggests this should be it: namely, the correction that becomes the breakdown. Stocks bounced yesterday at necessary levels to prevent such a breakdown, but drawing on the historical analogs any attempted rally out of that should be quickly reversed by the bears. The lack of positive divergence at yesterday’s low suggests there should be a lower low ahead, which could then provide the technical break for a much more voluminous sell-off. At that point (the dawning of this being the dip that isn’t bought), I expect precious metals to finally take off, creating a sharp short-squeeze in gold and silver.