The bear event we have been anticipating has arrived, writes Jeff Greenblatt.
You can’t say I didn’t warn you. How many different ways did I warn this would happen? Let’s start with the Federal Reserve. All the QE in the world would be powerless against a potential pandemic. What is a black swan? It’s an event that comes seemingly out of nowhere the crowd doesn’t expect that knocks out the market. Well, the market is not out yet but if this were a boxing match, I’d say it has sustained a few body blows as well as a couple of shots to the head.
The best thing that might happen to the market is another day like Monday or Tuesday. Why? Fear levels reached 36.20 on the Cboe Volatility Index (VIX) back at the last real correction at the end of 2018 (see chart below). Right now, we are sitting close to 30. In terms of fear we are not there yet. But if everything subsides while people go back to their normalcy bias and allow the VIX to trade back down all that is going to happen is another round of what we just experienced. Who knows, perhaps the VIX needs to get a lot higher. Recall the last time the correction ended it was over the Christmas break with a lot of traders on vacation. The VIX never had the chance to get to 50.
We are not going to get into the blame game of how this is being reported. I’m going to keep this very simple. The crowd was alerted to cases of Coronavirus materializing all over the world. The knee jerk reaction was to sell and quite frankly, I’m surprised it took so long. The reality of the situation is markets would’ve panicked back in September if the Fed didn’t roll out the next phase of QE to rescue the repo market. The economy is not nearly as good as has been reported. If it was, do you think Trump would be pounding the table for lower rates? I believe there has been a slowdown prior to the virus.
But we have a virus that is coming at us in waves. That’s what makes this a rolling black swan. Unless you were trading back in 1918, none of us have seen anything quite like this. So, they reported cases are exploding and the Dow is now nearly 2700 points off the high and close to 2000 points below last Friday’s low. Here’s the most important question. How many believe the coming supply chain interruptions from China are already baked into the price?
There’s two parts to this virus. Number one is the sheer magnitude of the size to the human health issue. The other side is the economic impact which could linger for weeks and take a major bite out of global GDP. Yes, the wolf is truly at the door this time.
So how did the cycles identify the top? Despite the market running through every other cycle since September, this top hit at 234 weeks from the low of the 2015 correction in the Dow. Aside from the conditions in the natural, the cycle work validates. Right now, this is typical bear market activity. Wednesday morning started with a nice bounce but by late in the session all the gains had evaporated with the Dow hitting a new low. The Nasdaq 100 was not far behind. One would think the pattern should be close to a low with a relief bounce coming. The takeaway is there is nothing as far as a low is concerned that jumps off the page and until that happens, we can’t even think about a bottom.
We talked about crude oil, it made it to first important resistance and also evaporated. Recall, the projection was not for a new sustained leg higher but for a move to retrace the drop with uncertain duration. The fact crude oil is getting hit can’t be good for the economy. But I will say this, the chart of the week is the EUR-USD currency pair, which has a 36 vibration at the low. The prior rally leg was 136 days at .03602 up. I wanted to see what would happen when it hit 36 days down. It turned on day 37 and has looked good ever since (see chart below). That has implications for the U.S. Dollar Index as well. It looks like it could go even higher and until I see a reading that jumps off the page, the EUR-USD appears to have changed direction. Strange that precious metals and the U.S. dollar are going in the same direction.
This is a year like none other. Everyone needs to be at the top of their game. Prior posts have given strategies on how to do that whether you understand Kairos or not. Be sure to plug into good sources of information and be at the top of your trading game at all times. This is not the year to take positions and leave them alone! The wolf (disguised as the bear) is knocking at the door, he is hungry and appears serious for a good meal this time. Be prepared!
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