On the morning of Wednesday December 26, the first trading day after the Christmas Day holiday, the ES (e-mini March S&P 500) plunged to a new three-month corrective low at 2316.75, a full 21.4% beneath its September 21 high. In the hours thereafter, ES reversed strongly to the upside, from an acute oversold condition, and with a bit of prompting from the POTUS.
In my closing commentary in our member room at MPTrader.com, I wrote:
"Today, the besieged bulls finally got some payback after weeks of downside, and days of relentless late-session selling pressure. After an "iffy" start to the session, today turned out to be just the opposite of the prior 4 days, exhibiting a bullish intraday profile and strength during the last 20 minutes of trading. Indeed, the last few minutes of trading morphed from prior day's long liquidation events into FOMO -- Fear of Missing Out -- on a powerful upside reversal day that should have momentum tailwinds to the upside ...
"Technically, there should be enormous near-term tailwinds generated by today's key upside reversal that point to a challenge of the upper channel boundary at 2540, into the 2560/70 overshoot target zone before this rally is exhausted."
In the aftermath of the Christmas Upside Reversal, last week ES (e-Mini March S&P) traversed a range from 2438.50 to 2539.25, or 100.75 S&P points (4.1%), and ALL OF IT occurred on Friday after Jay Powell acquiesced to the wounded easy money masses, appearing to become a kinder, gentler, and more investor-sensitive Fed chairman.
The "Powell Thrust" propelled ES up through the aforementioned "upper channel boundary at 2540," confirming my expectations for momentum tailwinds in the aftermath of the powerful December 26th Bullish Engulfing Candle (aka Key Upside Reversal Day).
Did the Powell Pop expend the remaining upside momentum from December 26? And if not, where might ES go from here? In that Friday’s 100 S&P point up-day also represented a Bullish Engulfing Candle (aka Key Upside Reversal Day) -- the second in the past 7 sessions -- I am expecting follow-through strength that has as its next target zone 2580-2600, as noted on our latest chart.
Let’s notice that each of the major upside reversals (12/26 and 1/04) coincided with a very supportive statement from a heavyweight political figure or Federal Reserve official. On the first occasion (paraphrasing), President Trump told the press that he thought the (20%) stock market sell-off was a great buying opportunity. On the second occasion, Fed Chair Powell told investors what they wanted to hear—that the Fed would become much more sensitive to and dependent on “data” from both the real economy and the stock market. At this time, real economic data and stock prices are telling the Fed to exert more patience before continuing to raise rates again in 2019.
Whether President Trump is proven to be a lucky market timer like President Obama was in March 2009 remains to be seen. What is proven, however, is that without an accompanying very accommodative Federal Reserve policy to support and motivate investors, presidential prognostications about a bullish turn in the equity markets are destined for the trash heap.
Since late in the Fall, a tightening Fed presided over a 20% market correction amounting to 630.25 ES (S&P futures) points, while the combination of a POTUS “buy recommendation” and Fed Chair Jay Powell’s communications designed to ease frazzled nerves (without easing rates) has scored a recovery of 222.50 points, or just 35% of the entire Sep.-Dec. decline.
Meanwhile, Quantitative Tightening (Fed reducing its $ trillion balance sheet by $50 billion per month, expiring Mortgage Backed Securities and Treasury Bonds) remains on “auto-pilot” until Jay Powell and Company decide it should be modified or curtailed. The Fed reduced its balance sheet by $420 billion during 2018, and is expecting to reduce it by another $600 billion during 2019! The Fed remains in tightening posture, regardless of Powell’s pronouncements this past Friday.
With the next FOMC policy meeting, statement, and press conference scheduled for January 29th and 30th, we are unlikely to hear from Fed Chair Jay Powell again for at least three weeks, but we will definitely hear from President Trump, probably more frequently this coming year than in the past (if that is possible), owning to the proximity of the 2020 election.
If bullish equity index price action continues to coincide with or depend on extraneous positive POTUS and or Fed headlines, then for this week, potentially positive (or negative) market catalysts will have to emanate from progress in the US-China trade talks (or not), and resolution of the Government Shutdown (or not). Although a new earnings season begins this week, possible directional catalysts will have to wait until Wednesday for results from Bed Bath & Beyond (NASDAQ:BBBY), KB Home (NYSE:KBH) and Lennar (NYSE:LEN).
Right now, my technical set-up and momentum work on ES point still-higher, into the 2580-2600 target zone where I will be expecting the recovery rally off of the Dec. 25th low at 2316.75 to exhibit both pattern completion and upside momentum exhaustion. In the absence of some sort of bullish catalyst that triggers additional nearer term upside progress that propels ES towards 2650/60, my work continues to warn me to treat strength as a fleeting (though powerful) counter trend rally within the dominant downtrend established after the September high.
For the start of the new week, only a decline in ES that breaks below 2490/95 support will be a significant warning signal that the recovery rally is over prior to reaching my optimal next upside target of 2580-2600, and that the dominant bear trend already is reasserting itself. ES closed at 2529.50.