Authored by Sven Henrich via NorthmanTrader.com,
Are we setting up for Bear Trap #2? After a 10% rally in $NDX in as many days a pullback was in the cards. From the Weekly Market Brief:
“We’ll be reaching short term overbought readings into early December just ahead of traditional short term weaker seasonality. There likely will be some fade/retest trade opportunities. Indeed bulls need to avert a sell the news scenario. A renewed drop below 2700 would constitute a major warning sign for bulls. A drop below the October/November lows would fully open up the lower risk zone again”.
Hence it made sense to close the $ES long setup on the aggressive rally.
Yesterday’s 5th 3% down day in 2018 certainly has now brought the bull case into question. Was it a bull trap? After all the weekly charts show potential bear flags with much lower price targets i.e. 2460 on $SPX:
And the action was relentless on the heels of multiple headlines and structural events that drove the selling:
Tariff Man soured sentiment by admitting he had no China deal, Brexit had a major setback in the UK, Saudi and Russia’s oil deal became a non deal it seems, and then, once $SPX dropped below the 200MA, quant funds commenced relentless electronic selling of over $50B in notional exposure and once stuff like this happens you can forget about support levels. Absolute relentless selling across the board:
The close? 2700 $SPX leaving $SPX again in chop range:
Last night there was a lot of talk about 3% down days in December. Since the 1950s there have been exactly 3 years with a 3% down day in December: 1987, 2000, and 2008. Scary as all these were notable bad years.
Well let’s have it then and look at these years.
1987 was the October crash which was also the low.
Here’s December through January:
What does that tell us? Well the 3% down day was followed by one more down day and that was the low for December and then markets rallied hard into year end and early January.
2000:
The 3% down day came after several days of hard selling before launching a Santa rally and then selling hard again into year end and then higher lows before rallying hard in January. Chop prime.
What does that tell us? 2000 was the year that made new yearly lows in December. In today’s terms that would bring us below 2530 before the next big rally.
Perhaps this replay but worse:
But it also says this would be a tradable buy.
Problem with the 2000 analogy of course is the 3% down day yesterday happened after a rally not after several days of down.
And then there is 2008:
The 3% down day occurred on the 1st of December and guess what? It was the low for December. And that day closed right at the lows of the day.
What does that tell us? Well it means we could’ve seen the low here as well. After all my test line for the bull case was 2700 as I had outlined this weekend and we closed right at the lows at 2700.
Bottomline: In all 3 of these 3 rare examples a low for December was either in on that day or the day after. Even in the 2000 case the 3% down day was followed by a rally after slight new lows on the following day.
To emphasize: All 3 examples marked BOTTOMS for December. They then produced rallies which could be sold into into early January.
Now we can’t rely on this precedence, but I can point out the fact that this is what happened in each of these cases of which there are only 3 since the 1950s.
A repeat may then set up for yesterday’s drubbing to form the basis of another bear trap. On twitter yesterday I outlined what such a bull scenario could look like:
I emphasize: This is an unconfirmed pattern. For now the .382 fib has held as support, but risk remains lower.
Looking at similar setups on the cash charts these type of potential patterns have room a bit lower before becoming invalidated:
Note $VIX spiked into resistance yesterday before retreating a bit.
None of this confirms a bull case, indeed probably the biggest risk for bulls now is that potential $VIX bull flag on the weekly chart:
Bottomline: Bulls again need to step it up and fast. A weekly close above the daily 5 EMA and weekly 5 EMA could support the view that this may have been a bear trap. However any sustained move below 2670/2680 and bulls may be in major trouble.
There is plenty headline risk in both directions right now. The OPEC meeting on Thursday, NFP on Friday, the Mueller event risk remains, the Brexit vote on December 11th and who knows what Tariff Man will think of next. So buckle in, either way it’s shaping up to be a December to remember.
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