DJI: Triangle Break Down/Selloff After Fed Announcement on 3/21?
It's been a rough and volatile month from mid-Feb til now. Both Bulls and Bears have been right AND wrong (including me), but what is clear with time and charting is that both buy-backs and sell-offs have been increasingly triangle range-bound, at least in DJI...but with lower highs and higher lows. Although I was wrong about the immediate direction of DJI and DIA on my last post, I think we are at the verge of possible still a big bearish movement in the next couple of days.
First of all, if you notice the trendlines for the recent market action, there are clearly lower highs in the upper trend line and higher lows on the lower trend line. This is forming a classic "symmetrical triangle" with the apex at around 25000 on DJI. But it's coming to an apex soon (by the end of the week, if my charting is correct) and SOMETHING has to give. The bulls and bears tug-of-war February-March battle is going to end soon.
What will happen? There's a couple things to note:
1) Currently, DJI has ALREADY broken BELOW that bottom trend line, and that's a worrisome sign of the at least SHORT TERM direction this will take. Also it has violated it's 50 DMA (as has SPX) and tested 2 week lows
2) The Fed will about 100% guaranteed announce an interest rate hike tomorrow on 3/21 in the afternoon EST and there are worries that talk of a 4th rate hike will happen as well, which would upset the market. The last time there was SUCH an anticipated Fed announcement (in December 2015, when the Fed FIRST starting raising rates again since the recession of 2008), the DJI market sold off nearly 2000 points (about 10%)
3) The 10 year Treasury bond yield has started to rise again to near the 2.9% range and the Treasury yield curve has started to flatten, which was a great negative indicator and a worrisome sign, prior to the last 5 major recessions
4) Although QQQ and NASX have weathered the recent February correction storm well, and have a more ascending triangle technical picture (which is bullish), there's a lot of broadly negative market chatter on tech-heavy giants like FB recently, and as we have seen the last few days: As goes FAANG companies like FB, AAPL, GOOG, AMZN, NFLX, so goes the market. If FAANG starts to sell-off big, watch out.
As I've said before, a break above 25000 or so on DJI after the Fed announcement would still be bullish. But I think short term, there are a lot of risks to the downside and the market could sell off to SUPPORT (S1) as low as February 2018 lows at least (~DJI 23600), which would bring us back to around mid-November 2017 levels BUT if there is a massive sell-off afterwards, let's now look at other SUPPORTS again. If this S1 support level of ~23600 or so is broken, the next level we would test (S2) would be the mid-October 2017 levels of 22700 or so. The last level of support I can see (S3) is 22300 or so, or September 2017 levels. If S3 (22300) is broken, that would represent almost a 10% drop (or near the definition of a correction), if it occurred, and then look out below!
That being said, after any Fed related sell-off, and the inevitable volatility that follows, I believe there will be a gradual and inevitable climb upwards in all the indexes and the market, as BTFD buyers come in, as they eventually always do. But I would just prepare to the downside and at least hedge, if you have fully bought into the market on the last correction. You just never know! Maybe I'm right, maybe I'm wrong. It just doesn't hurt to be cautious around major market-moving events, like the Fed announcement!
(DISCLAIMER: I'm mostly cash now, but may add puts on DIA/QQQ/SPY soon, as well as puts on FB, GOOG, AMZN, NFLX...And then eventually I'll also BTFD for the long-term afterwards. This information may be useful in determining when to start opening up a long position, or possibly when to BTFD or STFR for a short-term swing play, but as everyone knows, it is very difficult to time the market. Do your due diligence and examine risks)
First of all, if you notice the trendlines for the recent market action, there are clearly lower highs in the upper trend line and higher lows on the lower trend line. This is forming a classic "symmetrical triangle" with the apex at around 25000 on DJI. But it's coming to an apex soon (by the end of the week, if my charting is correct) and SOMETHING has to give. The bulls and bears tug-of-war February-March battle is going to end soon.
What will happen? There's a couple things to note:
1) Currently, DJI has ALREADY broken BELOW that bottom trend line, and that's a worrisome sign of the at least SHORT TERM direction this will take. Also it has violated it's 50 DMA (as has SPX) and tested 2 week lows
2) The Fed will about 100% guaranteed announce an interest rate hike tomorrow on 3/21 in the afternoon EST and there are worries that talk of a 4th rate hike will happen as well, which would upset the market. The last time there was SUCH an anticipated Fed announcement (in December 2015, when the Fed FIRST starting raising rates again since the recession of 2008), the DJI market sold off nearly 2000 points (about 10%)
3) The 10 year Treasury bond yield has started to rise again to near the 2.9% range and the Treasury yield curve has started to flatten, which was a great negative indicator and a worrisome sign, prior to the last 5 major recessions
4) Although QQQ and NASX have weathered the recent February correction storm well, and have a more ascending triangle technical picture (which is bullish), there's a lot of broadly negative market chatter on tech-heavy giants like FB recently, and as we have seen the last few days: As goes FAANG companies like FB, AAPL, GOOG, AMZN, NFLX, so goes the market. If FAANG starts to sell-off big, watch out.
As I've said before, a break above 25000 or so on DJI after the Fed announcement would still be bullish. But I think short term, there are a lot of risks to the downside and the market could sell off to SUPPORT (S1) as low as February 2018 lows at least (~DJI 23600), which would bring us back to around mid-November 2017 levels BUT if there is a massive sell-off afterwards, let's now look at other SUPPORTS again. If this S1 support level of ~23600 or so is broken, the next level we would test (S2) would be the mid-October 2017 levels of 22700 or so. The last level of support I can see (S3) is 22300 or so, or September 2017 levels. If S3 (22300) is broken, that would represent almost a 10% drop (or near the definition of a correction), if it occurred, and then look out below!
That being said, after any Fed related sell-off, and the inevitable volatility that follows, I believe there will be a gradual and inevitable climb upwards in all the indexes and the market, as BTFD buyers come in, as they eventually always do. But I would just prepare to the downside and at least hedge, if you have fully bought into the market on the last correction. You just never know! Maybe I'm right, maybe I'm wrong. It just doesn't hurt to be cautious around major market-moving events, like the Fed announcement!
(DISCLAIMER: I'm mostly cash now, but may add puts on DIA/QQQ/SPY soon, as well as puts on FB, GOOG, AMZN, NFLX...And then eventually I'll also BTFD for the long-term afterwards. This information may be useful in determining when to start opening up a long position, or possibly when to BTFD or STFR for a short-term swing play, but as everyone knows, it is very difficult to time the market. Do your due diligence and examine risks)
Comment:
Sorry I meant to put in NDX, not NASX in my analysis above. Will be really interesting to see how the rest of March/early April plays out!
