Late October cut:

• This time, the market bull structure clearly broke. A lower high and low was made. This is a bullish failure. Careful#1
• Then we get a bearish correction with abnormal volume — point A on the chart. Careful#2
• Lower lows are printed, which confirms the break in market structure.
• Once again, prices move into a buy zone around 652.

First conclusions

1. Technically, this level becomes highly relevant and this isn’t happening just because of technical analysis, it’s happening because everyone is watching that level as a reference. (652)
2. Double top prices are the other technical relevant points.
3. Market change is very clear between both meetings with very different reactions after each one of them. Different macro narratives in between meetings. Careful#3.
4. The market is on standby.It didn’t print new highs, but it’s very close.
5. They couldn’t produce a new all time high though.

Most important message

• The last leg higher, post-correction, happens on declining volume.
• Technically, that’s called divergence — in this case, bearish.
• In technical analysis, this is the most powerful signal.
• Not because it’s precise in timing, but because it’s showing that fewer and fewer buyers are stepping in.

Let’s not forget: at some point, buyers run out.Basically, they are a finite number. Not infinite.There are no sellers yet, but when they showed up, it was like a catharsis. Look how different quantities of volume appear on the selling.

Digging deeper, On-Balance Volume (OBV)

Below we have the On-Balance Volume values. For some, it’s a technical indicator. I use it as a proxy for how crowded the trade is, following its mean which is the red line.

OBV accumulates the volume of up days and subtracts the volume of down days. Of course, it’s a proxy — but a valid interpretation of the net is: these are the trades that didn’t “exit”, or the volume that kept in the trade.

Trade population is an excellent way for estimating potential targets and it does influence P/L estimates.

Timeframe note:

This is a daily timeframe, so its relevance lives in that dimension.

We keep going deeper: Weekly Time Frame

• The two Fed meetings are marked. If you sharpen your eye, you can see how the weekly volume is abnormal in the last correction. Way past median volume.
• Same level: 652. We’re all watching that price — either to get in or to get out.
• If that level breaks, the dam opens in the search for a new low — only this time, market structure is already broken. Careful #4!
• Technicians call this formation a double top: two attempts to keep pushing higher and two failures. Again, if you don’t believe in technical analysis, think of it like this: we’re all watching those highs.
• The difference is that this second attempt comes with much much less volume. Careful #5!

If you look at how many people are inside the trade, on the weekly timeframe, you start seeing the big picture with a longer-term perspective.

Relative to its recent past, there has never been this many people at the party. There’s potential for a big move, as people run out, destroying prices on the way out. There’s limited upside considering trade population, though liquidity injections and aliens buying could keep this thing going.

The big big picture: Monthly time frame

This type of investor doesn’t look at a daily chart.This is the investor who looks at fundamentals: valuations, GDP, inflation, earnings, FX, and more.The full intermarket picture and the core difference between a professional retail trader and a global investor base.These are the elephants in the room.

Let’s start, without getting scared

• The party has never had this many people. Never ever since the beginning of the ETF, approx 1993/94. Feel free to check this on your own platform.
• And since the start of Covid, it has only been going up.

This situation has several drivers, some of them we discussed in depth in the blog. They range from the constant injection of liquidity — through whatever channel you want to think about: deficits, M2, QE, QT, the SRF, MBS, etc.

There’s also a cultural backdrop in the retail investor and market changes

• They left bonds, tired of losing to inflation — or simply because they want more return.
• Or they think stocks only go up in the long run.
• There are big changes in market possibilities for levering up

Adding all of this, we have a completely different market, with different potential and behaviours.

The only thing that does not change is humans’ actions, reaction rules and psychology. History is the ultimate prediction tool out there

The Feed meeting and Buyers

Just never forget, at the end of the road, buyers run out.They’re a finite number — and in recent times that number kept growing because of this:

“According to FINRA, US margin debt is sitting around record highs, above the USD 1.1 trillion mark, while several prime-broker reports and press articles point to hedge funds running near-record gross leverage in US equities (sources: FINRA margin statistics, plus recent coverage in the Financial Times, Bloomberg and MarketWatch).”

This has the power to create a systemic failure.

A peak of Intra-Market

• Look at this week’s rank laggards and who is losing ground. That’s a risk-off.(shaded area)
• In the last column, the percentage distance to the 52 week- highs.We’re at nothing — and a lot — from them at the same time.

Fed meeting and the risk takers’ message

Flows: Bulls (+x3) running as fast as they can….(shaded area)

Flows: Bears (-x3* running as fast as they can…. in the same direction….(shaded area)

Risk-off, and now we wait for the catalyst. Fed meeting.

Martin