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Q4 Earnings Setup The Rally To The Peak

Our research team believes the current Q4-2019 earnings season and expectations are prompting a “Rally To A Peak”.  We’ve been warning our followers and clients that we believe the US Stock Market has rallied to levels that constitute a “near peak enthusiasm” related to historical price volatility.

As you’ll see from these charts, below, we are not dismissing this current upside rally and the potential that it could last for many weeks or months longer – we’re just warning our followers and clients that we believe a very volatile period or price rotation is setting up within the next 10 to 25+ days as prices reach the historical upper boundary.

Our researchers believe that price channels are a very common form of technical analysis.  Price enters a channel when defined boundaries are established and when price continues to rotate within these boundaries.  Historically, when a price channel is broken or breached, a new price channel is quickly established.  You’ll see examples of this very clearly in the Custom US Stock Market Index and Custom Volatility charts below.

Within this research post, we want to highlight the rally levels across a number of our Custom Index charts because we believe the current US stock market rally is nearing a “peaking level/process” that may surprise many investors.  Even though the current price trend may be quite stable to the upside, price tends to rotate in up and down price cycles throughout shorter and longer-term trends.  We have termed this “true price exploration”.  It is the basis of the Elliot Wave theory and Fibonacci price theory.  The price must always attempt to establish new price highs or new price lows – at all times.

Put in more simple terms, the price will always rotate up and down within a trend – it will never go straight up or straight down.  There must be some rotation in price as support and resistance levels are established while true price exploration is taking place.  This process is the reason that we believe the global markets are setting up for a moderate price rotation/reversion in the near future.

This first chart, our Custom US Stock Market Index Weekly chart, highlights the recent upside price breakout that took place late in 2019.  We believe this rally is the result of a continued Capital Shift into the US stock market by foreign investors as well as continued fundamental economic data as a result of President Trump’s tax and deregulation policies.  The US/China trade deal, beginning to settle in November 2019, was also very good news for the markets overall.  As technical investors, these massive global concerns or positive events play a big role in understanding how the price will bias as it digests these positive or negative events.

The one aspect of this Custom US Stock Market Index chart we want to focus everyone onto is the Price Channel that we’ve drawn across the peaks and troughs of price over the past 2+ years.  The downside price rotation late in 2019 setup a defined price channel that we believe will act as critical price resistance in the very near future.  Should this price rally continue for another 2+ weeks, the price will very likely reach this resistance level – then what?

The current upside price rally technically confirms that price has already established a “new price high” and if this resistance level is a strong as we believe, based on the historical price channel structure, it may prompt a moderately large price correction/reversion event.  Once price rallies to near the upper price boundary, there is a very strong likelihood that price will experience hard resistance.  A potential rotation in price could prompt a move below 880 – the middle price channel level.

Our Custom Valuation Index Weekly chart highlights the amount of capital pouring into the markets and the fact that global investors continue to believe the upside price rally in the US stock market is likely to continue.  The past FLAG formation, from September 2019 till near November 2019, suggested that global investors were quite concerned about future valuation growth.  It would appear that global investors began to become very cautious in September 2019 – then started pouring capital back into the markets in late November/early December 2019.  It was likely foreign investors that began pouring capital into the US markets at that time.

Either way, the advance in the price of our Custom Valuation Index suggests that global investors believe the US stock market is, again, in rally mode into early 2020 and through Q4 2019 Earnings.

Now for the kicker. Our Custom Volatility Weekly chart is back into extreme overbought territory.  This indicator can stay in this range as price advances for many weeks – like what happened in late 2018.  Over the past 24+ months, every time the Volatility Index moved up into these extreme overbought levels, a moderate to severe price rotation/reversion took place.  This is important to understand for all traders.

Price could attempt to stay up in this overbought level for many weeks or months – yet the risk of a price correction/reversion would only gain strength the longer the Volatility Index stays above 19.  Be prepared for increased volatility over the next 60+ days and be prepared for a potential price reversion.  Our researchers believe we are very close to critical price resistance and an explosion in volatility.

As skilled technical traders, this is exactly what we want to see happen.  We want to be able to find and identify profitable price trends, prepare for price corrections and attempt to time our entries into various ETFs and sectors to be able to profit from these bigger swings.  As the rally continues to push higher, pay attention to the earnings data that is release and expect volatility to begin to move higher.  We believe a number of earning surprises are going to hit the markets.  These could prompt some 2% or greater price swings in the US markets.

This is the year you really want to find the right team to help you identify and trade these bigger trends.  Don’t let 2020 pass you by while these incredible setups continue to roll into bigger market trends.  Visit www.TheTechnicalTraders.com to learn how we can help you find and execute better trades.

Join my Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

Warning: Credit Delinquencies To Skyrocket In Q4

Farm delinquencies skyrocket +24% year over year as global trade issues and the ability to service credit continues to be a problem.  This is a tell-tale sign that the US Fed decreased the Prime Rate recently as a result of broader credit issues related to higher interest rates for corporate and other borrowers.  The last thing the Fed wants is another collapse on the lending markets similar to 2008-09.

(source: zerohedge.com)

Low growth continues to plague the global economy as this extended run in the US stock market continues to mature.  There are many questions all traders are asking – will it continue higher or have we reached a new peak in price activity?  Many economists believe we are ending an expansion period related to the revaluation of the global markets after the 2008-09 credit market collapse.  The typical price cycle of approximately 6~7 years has extended beyond traditional bounds and many analysts are wondering how it may end?

If an economic cycle has truly come to an end, we should expect to see some change in economic activity levels, consumer confidence and mortgage/housing activities.  The end of an economic cycle is usually aligned with some moderate level of economic contraction and a slowing of economic activity.  The one thing that may continue throughout this end of the mature economic cycle is the “capital shift” where capital rushes away from risk and into the US stock market as long as the reversion event stays at bay. (source: zerohedge.com)

Consumer Confidence levels have fallen recently to new lows.  This is a very clear sign that consumers expect the economy to contract a bit based on continued trade-related issues and the overall maturity of the economic cycle.

Most of the “rest of the world” has continued to binge on credit/debt since the 2008-09 credit crisis.  This is a very clear sign that the US Fed and global central banks have pumped trillions of dollars out into the consumer, corporate and global markets over the past 8+ years.  The question for all of us is when and if this debt becomes a liability – when does this credit become un-serviceable?

China and Asia were some of the biggest consumers of US credit/debt since 2008-09.  This graph highlights the incredible 10,667% increase in debt in China since the 2008-09 levels – from approx 300 million to 3.2 billion in 8-9 short years.  It appears the global economic rally was really the “binge on credit” rally.

US Mortgage debt has climbed to near all-time highs recently as well.  This is a sign that the US housing market has rallied to levels that are very close to the peak levels in 2007-08 – just before the crash.  It may also be a sign that cracks may soon start to appear in the housing markets across the US as delinquencies and foreclosures may continue to skyrocket.  People need to be able to service this debt/liability effectively in order to maintain their assets.

We believe the path of least resistance in the US stock market is higher – at least until price breaks below the current price trend channel.  The continued capital shift where foreign investors continue to pour capital into the US stock market will likely continue until some event shakes the confidence of these foreign investors.

You can see from our Monthly chart of the ES, below, we have highlighted the longer-term economic maturity trend which typically lasts about 6~7 years.  The rotation in 2015-16 was very mild as the US Fed continued a type of quantitative easing process by buying bonds and keeping interest rates historically low.  Because the US stock market actually failed to experience any real price rotation near this 2015~2016 cycle date – we believe the current cycle highs are extremely extended and related to the credit binge that has taken place over the past 8+ years.

Our cycle research suggests we may have already past a cycle peak event and may be operating on borrowed time right now.  This suggests that any further upside price activity in the US stock market may be a function of the overall strength of the US stock market compared to the weakening economic activity throughout the world.  In other words, the capital shift process is still feeding large amounts of capital into the US stock market as foreign investors flee risk and uncertainty.  If and when this ends, the US stock market will likely begin a price reversion process that may result in a very deep price correction.

This last Monthly ES chart provides a closer look at the technical indicator data that we believe highlights the overall weakness that is building up in the US stock market.  Even though we’ve recently pushed to new all-time highs, our technical indicators are suggesting that price is actually weakening in the upside price trend and could break lower at any moment.

The Direction Movement index, Momentum, and MACD of Momentum are all highlighting a weakening price trend that appears to be setting up for a broader downside price move eventually.  Traders need to be very aware of the risks in this extended upside price trend and to prepare for the potential of a new credit crisis event related to the current credit levels that are far more extended than in 2008-09.  If something breaks in the credit markets now, there appears to be nearly 5x to 10x the amount of credit extended throughout the global than there was 8 short years ago.

November will be the month of breakouts and breakdowns and should spark some trades. I feel the safe havens like bonds and metals will be turning a corner and starting to firm up and head higher but they may not start a big rally for several weeks or months.

October was a boring month for most major asset classes completing their consolidation phase. Natural gas was the big mover in October and subscribers and I took full advantage of the bottom and breakout for a 15-22% gain and its till on fire and trading higher by another 3% this week already.

If you like to catch assets starting new trends and trade 1x, 2x and 3x ETF’s the be sure to join my premium trade alert service called the Wealth Building Newsletter.

Happy Trading
Chris Vermeulen
www.TheTechnicalTraders.com