Friday, March 13, 2020

So what's your model?

Impressive finish late today, with the market facing full-spectrum intervention, everyone hoping it doesn't really implode (no, it has not yet).

And this is a Good Thing.  Respect that late surge, oh you bears, relax for a week and let the $VIX come back in.  It is very hard to accomplish much good with the $VIX pegged over 70.

Take a breather.  W5 down should make 20-baggers great again if it plays out.

My model holds that we are now crossing the great topping megaphone that began with the 2872 SPX high in January, 2018.  We are due to reach the bottom at 2100 at the end of March, after which we will bounce in a significant "B" wave relief rally.  

Presumably by April the R0 of Corona-chan will have peaked and we will see the light at the end of the tunnel, thankfully, a retreat of the dreaded Chinese-made-and-leaked bio-weapon virus.

S&P 500 hourly crossing the topping megaphone

The B-wave relief rally could retrace back up to 4 of A, or it could (more likely IMO) return to back-test the underside of the "bull market" rally channel itself at 2780.  Losing this channel caused the historic rout on Thursday.

In April, up until about the New Moon, it will be a death march uphill to attempt to regain the old rally channel.  It's all-hands on-deck for this one, the Fed, the banks, internet providers, U.S. corporations, everyone wants to return to the good times of endless asset inflation and credit expansion.  All will extend terms, look the other way, lend a hand.  Just let us have what we had before, please.

That's when C arrives, the real consequences of the fragile JIT supply-chain networks and dodgy financialized leveraged clown-world we created.

Here's a C wave crash based on the gorgeous candles we had in the fall of 2008.  The same geometry gives us bounces at 1040, 740, and a final landing near 520.  This is a shape of great beauty and power.

S&P 500 ABC with 2008 crash overlay

Does the Fed just run out of dry powder at the June meeting, with nothing left to give?  Losing the topping megaphone will be similar to losing the rally channel this week -- a market with no bid.  The only bounces then come from obvious technically significant levels and insane bursts of short-covering.

It could all be over by Labor Day.  Hoard good books and heirloom seeds.


christiangustafson said...

So that's a 32% rally on the S&P in April, until it rolls over again. What a fantastic long play on the bounce.

umdengineer said...

CG, I wonder if the PPT applies EW theory. If so what's to keep them from buying at 2100 in order to create a sustained bounce and therefore change the wave count?

As I (barely) understand EW concept you can "change" the direction of the impulse by zooming in or out. In other words the theory is never wrong just the interpretation of it. If the PPT buys just at the right time won't that make a new cycle?

christiangustafson said...

The question is then, can they really move the markets so? If everyone + mom is selling into it, or the bond market is on fire, I'm not so sure. I'm sure they look at TA, if not EW theory so much, then the usual divergences and opportunities where the right push may have a greater effect.

Had what I'm calling W3 here extended fully, it would have taken us to 2258 on the S&P 500! But it hasn't yet, unless we crash again right away this week.

If the "W3" is "it", then we tilt our heads and call it a "zig-zag" correction and go back to sleep. But when it's not again, oh crap, we get the wave 5 down an it's a big capitulation dump.

Any honest wave counter sees the alternatives, and for many the "alts" overwhelm and paralyze action. Even this guy, who can be pretty astute and follows the rules, completely missed the crash on Thursday and called for a sharp rally! He overthought it, and trusted an apparent divergence.

So I'm looking 2100 at the end of the month, an April relief rally, and then some very scary and difficult times through August.

The 2008 tape analog here is interesting, it suggests that we will hang in here, on the edge of doom, on the lower edge of the megaphone, waiting to see the policy response from the Fed in June. When they do not show up with helicopter moniez or some new scheme to force-feed the credit goose, then we go no-bid again.

I think this intense moment will be extremely tradeable with Q2 index puts. But there are several important swings before that will also pay.

umdengineer said...

Point taken. A more interesting question is whether this event puts an end to globalism? As countries hunker down and start developing internal industries to support their population, what happens to all those carry trades and other globalistic nonsense?

All those derivatives... what happens when one side says force majeure and the other side says force manure? Thanks to Trump there is no TPP, no way to force contract settlements or deal properly with debt defaults.

Countries can't trade with each other now even if they wanted. As local industry develops and emergency measures are put in place, it becomes increasingly difficult to takeover another country's economy. Perhaps it is a silver lining in all of this.

Alex said...

I suspect a week or two is how long before we first start seeing the cases mushroom to the point hospitals are overwhelmed in the US as well. Seattle should provide a front row ticket to this, ive heard they’re already at 2x capacity. Should fit your wave 5 as it becomes apparent.

Christian, can you make the waves fit on a time basis that allows for spring-summer recovery and dump again into fall? The economic damage may be done, but just looking st the growth rate in the northern vs Southern Hemisphere suggests the virus may not spread as well during the warmer months. Unfortunately it may be that we’re just stuck with this thing now and get to deal with it annually.

christiangustafson said...

You could stretch it out, sure.

But I suspect that even once the CV initial peak passes, the US corps will survey the wreckage and the new landscape and engage in restructuring and extensive layoffs. All of that corporate debt is still out there, from share buybacks and the run-up. The new normal will be very austere and a hundred times more serious than the last decade.

You have lost companies like IBM and Oracle, the horror-show cases like Boeing, just waiting to exhale.

This is why I have us hanging in there above doom until the June FOMC. Everyone is waiting for the structural policy change, the change in the rules, the analog to their buying MBS in the last cycle.

If they do not bring it, the market will go to long-long support on the ancient channel, the one that runs back to the 1920s. Murray Rothbard's brilliant book America's Great Depression describes the birth of the credit expansion that became US-led globalism that has brought us to this juncture.

The crash this summer does not end the $USD but creates the final act for it. At the bottom we will see some sort of qualitative shift in the rules, something never before tried, cribbed from some footnotes in an academic or Fed paper, that will carry us forward. MMT and the hubris of technocratic management of the system will move ahead, but the reality will be a series of violent thrusts and episodes like a harmonic vibration until the debt-backed monetary experiment finally crumbles.

You still have time to read Spengler and ponder the Faustian nature of all of this. The Austrians already know that the game will end, and, secretly, so do the Keynesians and neoliberals.

I wish Edward Shils were still alive, that I might discuss this all with him. I don't think he ever gave Spengler a fair shake.

umdengineer said...

Typically the neocons start a war when King Dollar is threatened. Not this time?

umdengineer said...

Thanks for the recommendation CG. It's available for free from Mises website

christiangustafson said...

It's like a fall from grace. We had the Fed, but we hadn't really used it yet. The credit expansion of the 1920s began under Harding and Coolidge, for many reasons and under many covers, but with support of the UK for its WWI expenses in mind.

When they finally tried to pull back from that expansion, we got the Great Depression. The story since then has been establishing the global dollar monetary standards, the full extension of the model out into the world.

It's a remarkable study of 1920s finance and the origins of the late-modern world.

christiangustafson said...

Well, there it is. Assuming that we make it to the June Fed meeting, they will have nothing left to offer, so inflection point.

Alex said...

Futures at lock limit. Just so I’m clear are you saying wave 5 may start tomorrow?

umdengineer said...

Bryan Franco said...

A fiscal backstop for corps and small biz in the trillions is the only thing that can help from a monetary standpoint. Cutting rates is now a joke.

christiangustafson said...

@Alex, I was suggesting that the thrust late Friday marked the end of W3, and that we might bounce around in a W4 triangle or some such for opex week.

Fed has put everything on the table now.

umdengineer said...

Would make a good anthem for the Fed

christiangustafson said...

So would this classic.

christiangustafson said...

IMO we reach the bottom at 520 SPX in September when the US Federal Reserve decides to expand their balance sheet, maybe start to look at it in multiples of USA GDP.

Alex said...

Thanks Christian. We do indeed live in interesting times. Good luck to all.

Kevin said...

On the question of overwhelming hospitals. Remember 1/2 the beds are taken up with elective surgeries and non-emergent admissions. And flu admissions are usually extremely high (in the same age groups that covid 19 hits) so hospitals are used to taking lots of elderly people struggling to breath. So, we may be simply talking about them being admitted for that instead of the flu (and you can only die once.) And since, I suspect, people who get it and recover quick never got tested, the death-rate percentage is probably much lower than being reported. Now the financial implications of a prolonged shut down of the global economy is real, and the people to blame for that are the politicians and WHO etc. Had they treated it has the flu - sick stay, everyone else get back to work and school - then we'd have been OK (eventually.) Now? Too late and we're all gonna die (from starvation.)

Kevin said...

Actually, you're more likely to die getting shot at the grocery store - or in a riot - well before we run out of food.

christiangustafson said...

Remember, 2285 SPX would be the full 1.618 extension level for this W3. If we don't get that, then look to other methods for determining the length of W5 (and the end of W4).

The drop this morning put W3 at about 1.4x the length of W1.

If the topping megaphone is our support, then I want to see us test the bottom at ~2100 at the end of the month.

christiangustafson said...

Chart updated with this morning's new low S&P.

Thinking we get through opex plus a couple of days.

Kevin said...

The best wave 3 low would be another couple days like today with panic at the end. My (wave 3) crash target is a tad below NAZ 6000, and a tad above SP 2000. Wave 4 high then would be near NAZ 7000 SP 2300. With 5 low near NAZ 5500 SP 1800. See any of those: aggressively trade them. Tis my plan, anyway!

Ken Smith said...

"If the market does a STANDARD fifth wave, then it could very well bottom soon. If it does an extended fifth... well. All I can say is let's hope it doesn't." - Pretzel Charts

Unknown said...
This comment has been removed by a blog administrator.
umdengineer said...

Isn't this an indirect way for the Fed to buy stock?

christiangustafson said...


Typo above, the 1.618 extension for a W3 here would be 2259 on the S&P 500, probably right into the Fed meeting tomorrow.

Bicycle said...

all these talks about trillions in bailouts and handouts, they will finally crash the bond market. they think it can't happen because they got away with it past 12 years. and when that happens the stock market will be abandoned to attempt to save bonds, they won't even care about it at that point. that is the big 3rd wave that takes us to the ancient lows.

christiangustafson said...

C wave, sir.

Crashes are ABC affairs.

I hold that we will finish "A" in March, bounce with a relief rally "B" in April -- which tests the underside of the rally channel up from 666 -- and enter "C" in May.

3 of C down presumably comes on the heels of the June Fed meeting.

These are ominous, terrible, historic times.

Ken Smith said...

Speaking of good books, here is my current reading list.

Man Into Wolf - An Anthropological Interpretation of Sadism, Masochism, and Lycanthropy - Robert Eisler

Cannibals and Kings - Marvin Harris

Power-Nihilism: A Case For Moral & Political Nihilism - James Theodore Stillwell III

christiangustafson said...

Power-Nihilism, lovely, sure.

My kid just read Pride and Prejudice and loved it. The characters got into her head, so vivid and realistic. I'm pushing Dreiser's Sister Carrie on her now, which will also blow her mind. She's starting to see the real power in classic works.

Spengler Spengler Spengler, still the most important thinker of the 20th Century, imo. Absolutely essential a century later.

Ken Smith said...

Don't forget to get her a copy of Might Is Right by Ragnar Redbeard! Amazon just removed every single copy of that book from their site. Let the book burning begin!

Ken Smith said...

"All the Universe is in a state of flux & men are but a swarm of querulous, heat-evolved insectivores, living aimlessly on the top of a floating cork, that whirls & darts & rolls over & over & over; amid the scum & froth & slime of a boiling, bubbling Alembic"

- Might Is Right