Equity indexes have slumped since making a high Sunday night on rumors of a U.S.-China trade breakthrough. Jeff Greenblatt, who will be presenting at TraderEXPO New York, March 10, says there may be more to the sell-off.
On Sunday night, futures gapped up on the news the Trump Administration could be on the cusp of a trade deal with the Chinese. When the pattern gapped up, it had the feel of a market that had no place to go but up. We’ve been close to that for a while. But I felt like it was going up forever. You may have felt the same way. By Monday morning, markets got nasty even if it was for just one leg down. Imagine, a buy the rumor sell the news sequence and there was no news. There’s no deal yet. I’ve never seen such a thing.
I didn’t apply myself to finding what could be triggering this high at first simply because I wanted to see a little follow through. We finally got that on Wednesday but its not what we could yet call a distribution day. But let’s talk about it anyway. Until last week, the rally was up 41 trading days. For the life of me, I couldn’t figure out the significance of the number 41. Some of the market couldn’t figure it out either because tech and the SPX made a higher high. But the Dow didn’t and is currently up 41 days with a high at 26241.42. Still, it didn’t hit me.
Then I looked at the Russell 2000, which is currently leading to the downside or what represents leading to the downside at this stage of the game. I looked at my own chart and it hit me that the original high for the Russell was the end of August, not the beginning of October like the other charts. Why is that important? The high was 141 days up and the Russell has a high of 1742 with a square root in the 41 handle of 41.738 (see chart below). That’s why 41 keeps replicating. When you look at the SPX or NDX its not so obvious. When you look at the Dow, it gets just a little interesting. When you look at the Dow and Russell, then you have a contender.
Now having a contender doesn’t mean we are going to win the championship. Ask any LA Dodgers fan. But if you are a bear, this is a hopeful maybe and the best chance for damage since January. So, these markets have a couple of changes in perspective. For one, markets finally reached the upper retracement levels and are at a point near the 78% retracement level, which is the last guard at the gate.
What are they guarding? This is the high probability level, if taken out, markets then engage a retest of the highs. Many rallies have died near the 78% marker. As far as we are concerned markets have stalled at this level since Feb. 22. Is the glass half full or empty? They could have sliced right through but didn’t. They could still hover at these levels and breakthrough at a later date. On the other hand, on Sunday night they finally hit the psychological point of where it felt like they were going to Mars.
March is different from January and February. We are a couple of weeks from the seasonal change point. If markets manage to turn up here, they could stall out around the March 21. On the other hand, we could have a correction or what would pass for a correction that already started and have it conclude by the time the seasonal change point hits. That would be a technical inversion of the cycle.
What else do we have going on this month? There is a challenge to the Trump rally. In case you didn’t notice, Mueller’s long-awaited report is scheduled to be released on March 26. Go check out Amazon and you’ll see for yourself. This is strange because Mueller is supposed to hand over his findings to new Attorney General Barr. Has this already happened? Why are we talking about it in a stock market report? Simply put, this report has been percolating for two years. The stock market rally bears the name of the President. If the Mueller report reveals anything serious, it could spark real impeachment talk and the market could tank. On the other hand, it could be a nothing burger.
If this developing pullback gains momentum we could end up in a situation where the crowd sells the rumor and buys the news no matter what the Mueller report says. I’m only saying this because the release date of the report is within a week of the seasonal change point. There is recent precedent for a major turn near the March seasonal point. You’ll recall the Japanese earthquake/tsunami and nuclear scare happened in March. The Nikkei virtually crashed leading up to the March change of season in 2011. The Dow hit a four-week low at the same time. So, I’m not predicting the end of the rally, its way too soon for that. But in the near term, given the current environment it is plausible we could get a timeout in the market over the next couple of weeks. If you like what you see concerning these vibrational square outs, I’d love to meet you at the TradersEXPO New York in the next few days.
