Stock Markets Bounce Hard Above the “Waterfall Zone”.

High Intraday Volatility Makes for Treacherous Trading.

The last two weeks of stock market trading have made for great “theatre” but not much else.  A terrific spectator event was the 1000 point intraday trading range in the Dow Jones Industrial Average (Dow) on Monday, October 29th, 2018.  Eerily, exactly 91 years earlier, the Dow was crashing for the second time in two days.  For more information about the 1929 Crash and some creepy similarities to today see: “The Stock Market’s Wile E. Coyote Moment”  (https://markonomics101.com/2018/10/22/the-stock-markets-wile-e-coyote-moment/).

The markets made for great spectating and drama but finished the last two weeks nearly unchanged.  Undoubtedly, the last few weeks have been brutal on traders, especially short sellers (https://www.zerohedge.com/news/2018-11-02/stocks-soar-biggest-weekly-short-squeeze-election-bonds-bloodbath)  Yet, when all the drama and hand-wringing of the prior two weeks ended Friday, November 2nd, 2018, the major indexes were only down slightly during that period and were only 5-11% lower than their peaks.

For the entire year 2018, now nearing to a close, the Dow has been locked into a fairly tight range of 24,000 to 27,000.  The Nasdaq 100 (NDX) has traded in a range between 6400 and 7700 and the Standard & Poor’s 500 Index (SPX) has been restrained between 2550 and 2950.

The “Waterfall Zone”.

As you can see from the slideshow, the charts of the major stock market indexes show each is perched above an area of major support at the 2018 year-to-date lows.  Below this is a wide area which has the ominous look of a cliff.  This area, called the “Waterfall Zone”, is like a trading “air pocket”.

In the case of the Dow, a breach of its support at the lower end of the trading range would create a picture-perfect pattern of lower lows and lower highs.  For many, this would confirm the Bear Market.  It would also weaken the expectation that market selloffs are ALWAYS opportunities to buy.  The “Waterfall Zone” is the opposite of the Parabolic Advance which preceded it.  The same people that drove stocks up in a frenzy are now the most urgent sellers.

 

Bull Market Correction or Bear Market Rally?

High levels of actual intraday volatility are NOT consistent with a healthy ongoing bull market.  More likely, this volatility signals a diminished overall level of liquidity.  Both the swiftness and scale of the intraday swings are a sign the number of market participants is fewer, as is their willingness to commit funds.  Thus, stock prices encounter less resistance in either direction.

Bear Market rallies have, as opposed to Bull Market rallies, their own unique characteristics and traits.  A good recap of how to tell a Bear Market rally, apart from the real thing, can be accessed here: “Characteristics of Bear Market Rallies” (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).

Another key consideration, in assessing the odds of BULL vs. BEAR, is the Federal Reserve and its impact on interest rates.  Longer term rates, notably on the 30 year Treasury Bonds, are now at new multi-year highs of 3.45%.  The shorter term maturities are also a whisker away from making new highs as well.

Four Horsemen Leading the Downside.

The Four Horsemen Of The Nasdaq Collapse (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/) are the four ultra-large market capitalization stocks which exert disproportional influence on the indexes.  The components are Apple (AAPL $1.03 Trillion), Amazon (AMZN $814 Billion), Google (GOOGL $745 Billion), and Microsoft (MSFT $817 Billion), (as of the market close on Friday November 2, 2018).  Together, they comprise 24% of the Nasdaq market or $3.4 Trillion of $14.3 Trillion (https://www.macrotrends.net/).

The charts for the Four Horsemen do not offer much encouragement.  AAPL broke its support on Friday, November 2, 2018 to make it “Four Out of Four”.  The first horseman to show weakness was GOOGL, which is actually approaching new 52 week lows: “Three Horsemen Left, Nine Hindenburg Omens”  (https://markonomics101.com/2018/09/14/three-horsemen-left-nine-hindenburg-omens/).

The chart for APPL alone is NOT CONSISTENT with a healthy, ongoing BULL Market.

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We continue to suggest the reduction of all types of risk, along with taking an inventory of your own personal proneness to the adverse conditions barreling towards us.  A beginning game plan can be found in: “How To Survive, Prosper, and Thrive in the Coming Bear Market” (https://markonomics101.com/2018/10/09/how-to-survive-prosper-and-thrive-in-the-coming-bear-market-part-1/). 

 

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