A Sloper with whom I stay in touch with on a regular basis, DukeInDubai, was kind enough to send me the following this weekend……
Shortly after the #twattop, markets showed weakness in the beginning of October, so I compiled a list of objective pros and cons for the bullish/bearish argument as you re-posted in “Animal Spirits.” Again, I’m going to try to formulate a list favoring arguments for both sides for only this dip. Obviously, I am bearish, but I still made every effort to formulate more bullish arguments.
Dead cat bounce argument:
1. Long term trend lines dating back to 2009 broke for the first time in SPX, RUT, DJI and many individual equities…
2. The SPX 2009 trend line did break and recover. However, the strength of that line acting as support should be diminished.
3. Long term trend lines are now resistance for the RUT and DJI. Those trend lines should be just as strong as resistance now as they were for support.
4. SPX 200 and 100 dma are history as resistance. However, the 50dma could still be resistance.
5. Possible massive H&S pattern in the making on SPX, DJI and countless individual equities.
6. ESZ4 1968 level was resistance, then support, then had a massive failure on Oct 9th making that massive resistance again..
7. I’ve never seen so much angst from the BTD’ers on this last dip. I think some Bulls were shaken a bit.
8. Lower low on SPX; First lower low of at least 10% on SPX actually since 2011. Note that 2011 was not an ATH or stretched valuation.
9. Huge ranges. Not a sign of a healthy bull market. Huge ranges would indicate a topping process.
10. Last meaningful dip near all time highs was July-Aug 2007 (>10%) did not make a lower low. This dip is different consider we did make a lower low..
11. Volume dissipating the higher the print.
12. Every government attempt to prop up any bubble has failed dating back to the Mississippi Co and South Sea bubbles etc. So whatever Yellen pukes out next week could be bearish.
13. The SPX 50dma is closest to the 100dma since the bullish cross over in Feb 2013.
14. RUT 2009 trend line still broken
15. OEX 2013 trend line still broken
16. The SPX 55 week moving average was tested. The 3rd longest streak in history. The 4th longest (1998) resulted in a 22% correction. The 1st (1929) and 2nd (1987) longest streaks resulted in a 50% and 33% correction, respectively. History is not kind to such a long rally.
17. High yield instruments had a dramatic rise from this V-Bottom, however the charts are still bearish.
18. QE is ending for real. The market doesn’t believe it or is in denial, even though its been known for over 12 months.
19. RUT still below all 50,100 and 200 dma’s.
20. DJI still below the 50 and 100dma.
Bounce to new all time high argument
1. We always bounce to new highs. It is a bull market until it isn’t.
2. July-Aug, 2007 was a meaningful dip. However, we did make new ATH’s in Oct 2007. This bounce could still make new ATH’s.
3. Fed goes full dove next week and extends QE or changes language as “QE as appropriate.”
4. Phantom Fed buy programs completely laying waste to human emotion and technical analysis.
5. There is no bubble, in fact we are truly entering into a long term period of economic growth, QE actually worked. As evidence that QE ending is priced in and replaced with price support indicating real economic growth.
6. Who cares about RUT? SPX did break a 2009 trend line, but V-Bottomed and climbed back above it. Just noise in a Bullish market.
7. OEX 2009 trend line was not broken. Actually the OEX bounced off the 2009 trend line.
8. Even after a short sell the rally pattern, BTFD is back in force.
In summary, the Animal Spirits post was more of a macro or longer term view of the Bullish/Bearish argument. This time I tried to formulate a shorter term argument for/against this monstrous V-Bottom dip. Will we make new ATH’s? Sure, why not, but weighing the risk/reward. The risk is definitely to the downside. There has been so much technical damage, another 10% push higher to even higher ATHs is not likely.