Not much has changed since my  Gone Fishing Newsletter: Where do we go from here? We are digesting a big drop and bouncing around:

Small Caps bounced but notice how they broke the 50D and Trendline support. For this technician, that’s a big deal – but will take some time to show it. Relative strength to SPX is also on support. I’ve written about this short trade set-up for weeks. Now that it at price target, I am expecting a period of rest to reset – higher, then lower into 2013 pricing levels.


Nasdaq is still selling, despite a strong Tech bounce Tuesday and despite NFLX earnings beat Wednesday. When the QQQs finally do turn, the reversal could present fabulous short-term chases/swings. I’ll let you know!

No Confirmed Turn Yet in SPX, especially with only 15 New Highs but 129 New Lows on NYSE and a record 32 market days in a row with New Lows over 80.

This level of breadth deterioration under the surface is why Funds go to cash.

There is Evidence to Hope – at least after a Retest that is. The following is a summary from a Great Read and Great Quant write up by ⁦@ukarlewitz⁩

SPX has fallen 3 weeks in a row more than 20 times, and all eventually retested or exceeded the low.

  • The composite Leading Economic Indicator (LEI) has peaked a median of 3 months before SPX over the past 50 years; the most recent reading was at a new cycle high. Based on this, a significant equity peak before the end of 2018 is unlikely. A recent post on this is here.
  • Employment, housing and consumption will weaken before the final equity top.
  • If there is a growing concern, it is in the housing data: new home sales peaked 10 months ago. Combined with the equity topping pattern described earlier, and you have the outline for a looming top. Of some comfort is that housing nearly always peaks first, and a median of almost two years before equity markets. Based on this, an equity peak in mid-2019 is quite possible.
  • Breadth may not be indicating an exact low in equities – and it doesn’t guarantee a notable top is beginning to form – but a strong rally is odds on.
  • The 1 month volatility is still trading at a premium to 3 month volatility, a condition that has only occurred near equity lows in the past 8 years, the last one being in early April before a 6 month rally.
  • Over the final 3 months of the year during mid-elections, SPX has risen 20 of the last 22 times (91%; from Nautilus Research).
  • So, while equities fell 4-5% last week and have given up most of their 2018 gains so far in October, this might feel like the start of a bear market, but that is the least likely outcome.

Lastly, I want to leave you with this Big Picture look, which John Murphy of StockCharts presents well:

John Murphy on Sector Rotation

The Sector Rotation Model in Chart 5 shows what different market sectors do at different stages of the business cycle. The red line represents stock prices, while the green line represents the economy. In the early stages of a stock and economic upturn, economically-sensitive Cyclical stocks, Technology, and Industrials usually lead the market higher. Materials and Energy usually turn up later as inflation pressures start to build. [That hasn’t been as evident in this cycle].Consumer staples, Health Care, and Utilities become market leaders in the late stages of both up cycles. [That may be especially true with healthcare]. Recent late cycle behavior suggests that investors are turning more defensive. Which is consistent with technical signs that we may be in the final stages of the nine-year stock uptrend. Notice that stocks (the red line) usually peak ahead of the economy (green line). That’s why we don’t use peaks in the economy to predict peaks in the stock market. It’s usually the other way around. Economic numbers reflect the present. Stock prices discount what may happen six or nine months from now.

So we have some time. Question is how much.

Thanks for reading and please consider joining me in the LIVE Trading Room where we work through Value and Momentum trade ideas and set ups every trading day.

At LaDucTrading, Samantha LaDuc leads the analysis, education and trading services. She analyzes price patterns and inter-market relationships across stocks, commodities, currencies and interest rates; develops macro investment themes to identify tactical trading opportunities; and employs strategic technical analysis to deliver high conviction stock, sector and market calls. Through LIVE portfolio-tracking, across multiple time-frames, we offer real-time Trade Alerts via SMS/email that frame the Thesis, Triggers, Time Frames, Trade Set-ups and Option Tactics. Samantha excels in chart pattern recognition, volatility insight with some big-picture macro perspective thrown in.

More Macro:  @SamanthaLaDuc  Macro-to-Micro: @LaDucTrading