Yes, much has recently been published about the 10-year anniversary of the 2007~08 market crash and many people are trying to make comparisons between then and now. Some of this information is valid and factual.
For example, the amount of debt now is much higher than the debt levels in 2004~08. This would lead some to consider the scope of any global debt related issues to be much larger and more dangerous than in 2007. Additionally, the types of levels of debt have begun to froth back into the dangerous and risky derivatives markets, ARMs and MBSs. Although we keep hearing, “this time it’s different”.
Last week ActiveTradingPartners.com published a research document that illustrated some of our newest modeling tools. The consensus analysis was that the bullish trend should continue for a while still, yet it will likely be more moderate in nature.
Price volatility should continue to expand over the next few weeks as price rotation becomes more evident. There is a potential near October 30th for a volatility spike to happen in the markets. This, most likely, would result in a moderately deep price correction or rollover.
Overall, we remain cautiously bullish for the US majors and continue to be wary of weakness that may creep into the markets. In other words, we continue to believe the markets will continue to attempt to push higher for a few more weeks at least – yet we are very cautious of any potential weakness or extended volatility because we believe this market could turn on a dime.
There are a number of factors that are starting to affect the markets going forward. Two of the most critical are uncertainty with regards to geo-politicial events and leadership and the other is the global central banks. Right now, it appears everyone is living high on the debt cycles that have been perpetuated over the past 8+ years as well as the run in asset valuations (homes, land, equities and others). This run has created a scenario where many people, many of them the under 40yo millennials, have leveraged themselves quite extensively with student loans, auto loans, home loans, credit card and other revolving debt. These are, in our opinion, the segment of the consumer market that will be the early warning signs for any new crisis.
Rather than go into detail regarding debt levels and delinquencies that are stacking up all over the globe, we will focus on the most simple concept for investors to identify – the failed top rotation of 2007 and how it will likely relate to current price activity.
The failed top rotation in 2007 formed after an extended run higher and as volatility began to increase dramatically. We believe a similar type of top formation will likely form in the US markets should any new rotational trend reversal form over the next few weeks/months. This also falls in line with our “moderate bullish trend – yet cautious” analysis of the current trend.
Take a look at this chart of the NASDAQ in 2007-08 and pay attention to the price rotation that occurred over 4~6 months before the crisis event really began to unfold.
In comparison, take a look at the most recent NQ data for 2017. The length of the moves on the current chart are extended (span a greater amount of time), yet the moves are very similar.
The double-bottom formation in early 2017 is unique and identifies key support near 5550. Any similar failed top formation would begin with increased price volatility, resulting in a VIX spike, as well as the expanded price congestion that is associated with higher volume repositioning in the markets. Notice that in 2007, the volume suddenly spiked higher near the middle of October as the volatility expanded. We would expect to see the same thing happen currently if this failed top pattern unfolds again.
As many of you are aware, it is impossible to accurately time and predict major tops/bottoms in the markets. The best we can hope for is to be aware of potential events before they happen and to be prepared.
In closing, we wanted to highlight one of the most concerning setups we can use to illustrate the potential for future volatility and price rotation in the US majors (and possibly global markets). The Metals markets are a key element in protecting against fear, inflation or deflation as well as major market collapse. When the metals markets are moving higher, there is typically a measured amount of fear or concern that is entering the markets. These types of moves can often be signs to investors that volatility or underlying events could be at play as smart money moves into long metals positions.
Our analysis of the Metals markets (via Direxion Daily Junior Gold Miners Bull 3X Shares (NYSE:JNUG)) shows we are setting up for a Wave 5 move higher which we believe could be a very dramatic move.
