Was Friday a blow-off top?
It was a higher volume reversal/exhaustion/black-bar candle with similarities to previous peaks.
It occurred with a super-spike in allocations.
And it occurred at the new moon, which often marks peaks.
Skew is back to high elevation, Trin ended Friday at the very low extreme and we can add to those the recent readings in ISEE put/call and Nymo for an overall case for stocks to move downwards from here.
Additionally, various indexes such as the Russell 2000 and the Dax have now risen as far as they should without jeopardising their ‘top is in’ status. Similarly, the divergences in breadth measures would be at risk if the upward break in equities is maintained. Recall the ‘failed’ top attempt at the turn of 2014: breadth was subsequently repaired and the process began again at the turn of July:
All year I have kept my worst-case scenario as a bull market top not occurring until the end of December 2014, and I still do. However, if equities were to keep rising from here for another 4 weeks, then I would expect the topping patterns in various indexes and the breadth divergences to be neutralised again. That would reset the topping process for a third time. I have great doubts that could occur but how/why might it?
I don’t see anything in November sunspot developments to suggest scientists have it wrong. The trend is still waning since April, which puts stocks on borrowed time. Yes, seasonality is now positive, and maybe for buybacks too. But the real geomagnetic trend remains down, which pulls the other way on sentiment. With the extreme readings in allocations, sentiment and put/call I doubt there is fuel for yet higher prices. Could we see a middle-ground whereby stocks hold up but trade sideways, thereby not resetting the topping process but holding them up until year-end? I can’t rule it out.
It all comes down to what happens this coming week. Recall the October monthly hanging man candle. By my calculations (positioning in the topping process and analogs) November should accordingly end down. That means we should see at least a 3% drop in equities this week from last Friday’s close. What might cause that? Exhaustion, I believe. See the mid-September topping candle in the first chart above, compared to Friday’s. A similar candle from a similar all-in / stocks can only go up positioning, and a sudden switch to bears in control followed.
If we look cross-asset, the behaviour in gold, miners, junk bonds, Vix and treasuries all support a break down in equities. But it has to happen now.
I was asked if I added short, but I am waiting for a clear reversal. If Friday was a blow-off top then we should see follow through to the downside as early as Monday. Should this occur I will be looking to add short positions with stops as we move down anticipating we won’t come back this time. But I want to see that clear follow through move to the downside.