At the moment, I want the same thing I’m guessing you want: Clarity. Thursday’s rally was annoying. After sleeping on it, I would best characterize yesterday’s action as Wall Street feeding on itself. Nothing fundamental that I’m aware of changed in financial markets yesterday, and thus my overall view of markets did not change either. Let’s take a look at where we’re at, and where we’re heading. The market is moving fast, so I am writing this on Friday at 9:30am CST.
Let’s start by looking at the /CL to /ES analog, and the /GC to /CL analog. The /CL analog looks back at what /CL was doing 10 years ago to give us a useful echo for what we can expect directionally in /ES. I have circled on the below chart where we are currently, as well as where the expected bottom is (the election). This analog gives clues about direction, not magnitude, and it continues to point aggressively lower into the mid-term elections in November. After the election, the analog points to an uptrending /ES market into the summer of 2023.
The /GC to /CL analog looks back at how /GC acted 20 months ago, to give directional clues for how /CL should act now. Again, these analogs give indications of direction, not magnitude. On the chart below I have circled where we are currently, as well as where the expected bottom is… election day. This analog gives a complementary view that /CL should also be expecting further weakness into election day, followed by a rally into next summer.
So how do we put all of that together into a clear vision for how to approach /ES? Let’s take a look at the below daily chart of /ES. We have remained in a sustained downtrend since the mid-August high. At the moment this decline has taken on the form of a descending wedge. (I’m sure technicians will correct me on a different name). The first thing I notice is a cluster of resistance that /ES ran into yesterday and today. It is the combination of the descending wedge line, value low at 3696, and the December POC at 3685. That cluster appears to have rejected /ES this morning.
As long as /ES remains below value low this month, I think the appropriate posture is to be bearish. The above cluster of resistance can be used as one stop of choice. Therefore, I expect further weakness in /ES into election day, followed by a possible sustained rally into next summer to create a lower high. I will be looking to take profits along the way on any moves that looks and feel like capitulation.
Finally, let’s take a look at /RTY. As the small cap index, it can give good clues of market liquidity if a trend is changing. We are not seeing a trend change in /RTY yet. There is a nice clean cluster of two POCs at 1783 on the small caps. This level is probably the best stop I see to use for a change in market direction over the short term. I remain bearish under that level.
Finally, these are challenging market conditions that we are living through at the moment. NYUGrad shared the below video this week. I found it useful, and I hope you do as well.
