Risk On is Almost Risk Off

The most important chart stock bulls want to keep a close eye on is the ratio of stocks to bonds. When rising, investors willing to accept risk, want to be heavily invested in stocks. When falling, bonds are the place to be as they are providing the best comparative returns.

As you can see, the ratio peaked in 2016 and in the process of changing character. Changing from an uptrend where higher highs and higher lows were the norm to one where lower highs and lower lows are occurring. All is not completely lost for stock bulls as the ratio is in a sideways consolidation and has held its key horizontal support level. Watch out though, if that level gives way that would be a strong argument it’s time to hunker down into less risky assets.

The Importance of 100

I’ve spoken ad nauseum about the importance of areas of support and resistance. Scanning my charts there is no better example than the $100 price level on the biotech sector ETF, IBB. The more times price touches a level, the more important that level is. As you would expect, when price is underneath the level, it acts as resistance and when its above, it acts as support.  

The reason I bring it to your attention is that (as of now) it appears as if price has broken below. If you were a holder of IBB, you should very seriously consider exiting your position as the higher probabilities are for price to continue lower. The target for the decline is down at 2016 lows near $80, some 20% lower than where we start the day. Of course, since our timeframe is based upon weekly closes (and its only Tuesday when I am actually writing this post), for this target to be validated, we would need to see a close below this level at week’s end and immediately followed by a confirmation close the following week.

When there is a very clear support/resistance level, it makes your investment plan very simple. When above be long, when below, sell or go short.

I Hope I am Wrong

I am sure you don’t need my confirmation to know the markets have a bug up their rear.  Since peaking in October, the SP500 has declined almost 12% peak to trough and sits just above the February lows. That low should act as support if prices want to probe lower.  Notice how the initial breakdown from the Oct high was a 3 wave (a-b-c) decline on falling volume? Also, how the current push down is set up to be exactly the same? We just don’t know where wave c will end on this push. If symmetry is any gauge, a logical target for c to complete is around the “support zone”.

Because the market moves in waves (its internal structure), we know a reflexive bounce is likely due soon (this coming week?). Short term traders will take this opportunity to add risk while longer term investors will need to see where this next bounce higher ends. A failure to break above the initial b wave high, would be the time to consider exiting all stock positions by selling into strength. A move higher would target October’s (and all-time) highs as the next logical area for a move higher to stall.

Most large downward moves are in response to either news or poor investor sentiment, or both. Which is why, I am going to stand behind my 10-21-18 video of why I believe October’s highs will turn out to be the end of this almost 10-year bull market.  I hope I am wrong.

Looking Over the Ledge … For a Clue

Keeping with being their role as a canary in the proverbial coal mine, US small cap stocks continue to lead the broader market both into and out of corrections. This includes the most recent correction that started in the August-September timeframe. As you can see in their weekly chart below, the price of the small cap stock index, IWM, sits right on critical support. A breakdown below the $142-$143 level suggests another 17% decline is in the cards based upon a confirmed head and shoulders pattern target, T1.

Another possible outcome we need to consider is that the current level will actually hold support, move higher on to new highs and remain in a bull market uptrend.

Between the above two possible outcome, I think we will see lower prices in our short to intermediate term future (new lows). But the market doesnt care what I think. There is a version of the breakdown that I am actually favoring at this time. The right shoulder of the pattern is unsymmetrical and a bit malformed (stunted in its time of development) as compared to the left. This can occur in strong downward trending markets but it is not a ideal. As such, I could see the market chop around here a bit more before it resumes its move lower. This would allow the right shoulder to further develop before the breakdown and flush lower occurs. Either way this goes, it is currently at an interesting level. Either way this goes, it is currently at an interesting level and one that shouold interest both bulls and bears alike.

The Art of Knife Catching

Was talking to a great friend the other day and they asked if they should buy bitcoin. I said before you do let’s play a game. I will get on the roof, with you on the ground and I will throw some knives to you. Depending upon how many you catch will determine how much you buy. She laughed and got my point. I have nothing against bitcoin, in fact almost any vehicle is on the table as an investment but any purchase comes with a major condition, only buy if its price is rising. Let’s take a look at the bitcoin chart to see why I don’t believe now is the time to be acquiring this cryptocurrency.

Long-term readers should easily recognize the ominous parabolic arc pattern. Parabolic Arc chart patterns are generated when steep rise in prices are caused by irrational buying and intense speculation. Parabolic Arcs are fairly rare but they are reliable that when they finally end, the result will be a steep and swift decline. The pattern typically terminates its uptrend and reverses direction upon a price break below the arc. If you are lucky enough to get in early, they are a way to immense riches … or devastation if you don’t have an investment plan (buy and hold)

As you can see after bitcoin broke the arc, it continued to fall, making lower highs and in the process forming a descending triangle pattern. These are typically continuation patterns, meaning there is a higher probability the break of the pattern will be in the direction of the prior trend (lower).  In this case, the break of the pattern that occurred 4 weeks ago points to a target in the area of $2900.  If that doesn’t hold, look out below as support doesn’t really show up until you get to $1000.

Because this is a logarithmic chart, it hides the magnitude of the decline. Put into perspective since peaking in December of last year, bitcoin has lost more than 80% of its value. Unfortunately for the millennials, they are the latest to be schooled by the markets and their early retirement dreams put on hold. It happens to everyone at some point which is being able to recognize irrational human behavior (parabolic arcs), confirmed by repeating patterns, helps to keep knowledgeable investors out of big trouble.

At some point BC will find a bottom and will be something worthy of your investment consideration. Until then, be happy you weren’t a part of the delusional crowd falling for the “hype” and “story” as they always precede parabolic arcs.