False Dawn

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I think a bounce started on Friday. /ES saw three weeks of sideways consolidation between 3800-3900, after breaking back under 3900 in mid-December. I had hoped for a short term thrust lower last week to put in a noticeable short term bottom. That didn’t happen. What we got instead was the 3800 level holding as support. There is very little support at the 3800 level. I see it as a short term phenomenon.

First, let’s take a look at the daily chart of SPY below. Highlighted in red are the three clusters of monthly POCs that I consider to be key levels of support/resistance. Also noted are monthly value high/low for SPY. Value high is at 397.28, and value low is at 376.21. The good news for bears is that under the lows of the past few weeks, there is really no meaningful support for quite some time. For the moment though, I think the bounce needs to be respected until the recent lows give way.

So how high and long can a bounce go from here? Well, the key long term fundamentals haven’t changed for me. QT, higher interest rates, and the world reorganizing into a new order. With that backdrop, I remain long term bearish. For the short term, the two red POCs cluster boxes will likely serve as the key resistance for this bounce. For the bears, the risk is that a move above SPY 395 opens the door to a likely move up to SPY 413. I see that move as the primary risk/reward for January.

How does that scenario mesh with other tools that I use? Good question. Let’s take a look at the /CL to /ES ten year analog. This tool looks back at how /CL acted 10 years in the past to give us clues as to what direction we can expect with /ES now. Below is the daily chart for USO during 2013. To start the year the analog is looking for a bullish move in /ES for January, followed by a bearish move from last January into mid-April. That is the first quarter trade that I am focusing on.

What is one scenario I am considering for how that move could look in the broader market? Let’s take a look at /NQ, as I see big cap tech as the downside leader in this market. At the moment /NQ resembles a structure similar to /ES in 2007-2008. After the initial thrust lower in the first half of 2022, /NQ appears to be forming a descending wedge, similar to /ES in 2007-2008. If a bounce occurs in January this year, I’d look for the rise to stop or briefly pierce the top of that wedge line, followed by a hard reversal. That reversal, if it happens, could make for an amazing short entry backed up by POC cluster resistance. I’ll be looking for that.

On Friday I closed out my large SPY short, kept my smaller short positions, and added multiple longs to take my portfolio to mildly net long. The criteria I used for picking bounce longs was:

  1. Companies I like for long term investments, but simply trading around now. AXON FLR INDA
  2. Companies I like, are oversold, but have farther to fall in the long term. SQ ADBE
  3. Commodities/futures that I track for trades. /CL SRUUF

Looking at the charts above, INDA is an ETF that tracks India. That is a long term play that I like relative to SPY. As the world order changes over the course of the next decade, I expect India to emerge as one of the winners. As I imagine what the world will look like after it is reshaped, India is one of the cultures/business climates that I can support. With that said, I consider it a position to trade around at the moment, as it will likely get caught up in broader market weakness, but to a lesser degree than its U.S. peers.

FLR is a stock that I have championed since the Covid bottom. I see it at the heart of a global sea change. For my entire lifetime, the U.S. has been exporting its manufacturing base offshore to lower costs. That dynamic is in the process of a secular change. FLR will be one the winners of manufacturing coming back to the United States. I continue to think you can own the stock as a long term investment.

ADBE is a company that I love. Its products are second to none, IMO, and their subscription model is a profit generating powerhouse. With that said it is still overvalued in a bear market, with a P/E of 32. Looking at my chart of ADBE you can see I think the bottom we hit in the fall of 2022 was the first key level of support. A break under that level opens up an enormously powerful decline to nearly 100. So, a possible bounce is taking root… But the trap door is set.