Tipping Point (Part 5): For Whom The Bear Market Roars?

Tipping Point (Part 5): For Whom The Bear Market Roars?

Times, they are a changing.” (Dylan)

With the exception of Precious Metals, which we covered yesterday (https://markonomics101.com/2018/09/16/inflection-point-part-6-what-precious-metals/), the “Inflection Points” are essentially at their completion.  To be more precise, there actually is no such thing as an “Inflection Point”.  It’s more of a process that takes months or years to complete.  If you look at the monthly graphs of interest rates that were presented last Friday, the bottoming out process has taken nearly a decade for the 5 Year Treasury Bonds (https://markonomics101.com/2018/09/15/interest-rates-continue-to-edge-higher/).  Inflection points are just not easily seen with the naked eye.

An Inflection Point or Process is the replacement of an old theme with a new emerging theme or trend.  The new theme gathers strength slowly and as the maturing or aging theme finally loses energy, the emerging theme replaces it.  The “Tipping Point” is the point, although not the exact second, that an EMERGING Trend overtakes an older SUBMERGING Trend.

The last bastion of strength of a maturing theme is currently represented by the mega-mega capitalization stocks on the Nasdaq.  Stocks referred to by some as the “FAANG”s (Facebook, Apple, Amazon, Netflix, and Google).  We have referred to the four largest, as the “Four Horsemen Of The Nasdaq Collapse” (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/).  In this group of Four, we have excluded Netflix and Facebook but included Microsoft.  These Four Horsemen are the only public companies to have market capitalizations north of $800 Billion.  No other company comes even close.

The price patterns of the Four Horsemen are eerily similar to those seen early this year in Cryptocurrencies (which have since gone down 80%) as well as another smaller asset Bubble in the Nasdaq called the Dot Com Bubble in 2000 which wiped out 85% of that index’s value in 2 years.

The business of writing about the future anticipated direction of change in the markets is next to impossible.  No matter how confident a prediction sounds, no matter how well it can be backed up or reinforced, the entity known as “Mr. Market” lurks around every corner and preys on the confidence of people like me.  And, by extension, you.  Just when you think you know all the answers, he changes the questions.  That said, and with the right amount of caution, let’s let the pictures do the talking.

Reverse Waves Made Simple?

First off, the chart below is of the Dow Jones Industrial Average and its 7-Point Reverse Wave Pattern coupled with its 5-Point Reverse Wave Pattern.  To make this appear less confusing and to provide more clarity regarding “Reverse Waves” (RW), each point (High or Low) is labeled with a number.  In purple, the 7 points constituting the 7-Point RW, and in light blue the 5 points constituting that pattern are labeled.  Hopefully, this will make spotting the two waves more obvious and the nature of the market behavior creating them will become clear.

A Reverse Wave is a Price Pattern which somewhat resembles a megaphone.  Progressively higher highs are simultaneously reached as are lower lows.  The Dow Jones Industrial Average has traced out TWO different, yet concurrent Reverse Waves.  The Points in Purple as well as the two lines in Purple, mark the 7 points constituting the Reverse Wave.  1, 3, 5, and 7 are the higher highs and 2, 4, and 6 the lower lows.

A second, smaller Reverse Wave is marked in Blue.  Points 1, 3, and 5 are the higher highs and 2 and 4 the lower lows.  Note that Point 7 on the larger wave is equivalent to Point 5 on the smaller wave in Blue.  Two reinforcing topping patterns occurring in tandem.  This, like anything else technical is not guaranteed, but it ought to give anyone pause.

Keep in mind, that to actually enter a BEAR MARKET, the Dow will need to break 23,500, a level which has held it all year.

The Last Horseman?

What a difference a day can make!  It was a matter of time before the nearly vertical climbs of these 4 behemoths and the Nasdaq 100 had to end.  They will all likely end badly.  It is fair to point out that both AAPL and AMZN have turned lower after failing to make new highs.  AAPL has apparently exhausted itself from its Parabolic move up and AMZN has now made a top below a top and bottom below a bottom: the very definition of a downtrend.  In the short run, they could manage to rally, but the likelihood that their Horsemen’s days are over has just leaped higher.  For the time being, MSFT remains BULLISH, but will likely soon rejoin its fallen comrades.

The Nasdaq 100 itself has decisively broken down from its Ascending Wedge and should now be viewed as BEARISH.  Nonetheless, it won’t really be in a BEAR MARKET until it descends below previous major lows at 6400.

A couple more charts “Bear” watching.  The Russell 2000 had actually shot to new highs recently and is now BELOW the breakout point.  In a healthy BULL Market, the Russell would be 100 points higher by now, not struggling to hold on to its feeble gains.   The Standard & Poor’s 500 is holding only marginally above the lower bounds of its Ascending Wedge.  The likelihood of an imminent break lower and the establishment of a BEARISH Pattern has surged higher.

Recently, we mentioned how damaging the possibility of higher interest rates would be to equity and debt markets (https://markonomics101.com/2018/09/15/interest-rates-continue-to-edge-higher/).  Interest rates edged higher today although by a few basis point (a basis point is 1/100ths of 1%).

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