Mid-Cap and Small-Cap Price Failures Fulfilling Overthrow Potentials

As previously published, key to market behavior is the participation of the small and midcap's the expected behavior was an overthrow and possibly an attempt impulse to trigger an impulse. So far, with internals at the extremes of the day and prices appeared to be being soundly rejected on these indexes this is a key point to watch in the developing inflection point discussed over the last months on these pages.

Daily Cycles Small and Mid Caps

Daily Cycles Small and Mid Caps

MidCap and SmallCap Daily Cylces

MidCap and SmallCap Daily Cylces

Updated Daily/Weekly Market Structure Projections

Ready Or Not Inflection Point Approaches as Central Banks Seek to Destroy Bear Paticipation

It has indeed turned out to be an interesting week, with the Fed meeting causing fireworks as should be expected. Clearly, this was a coordinated effort, as posted in the MCM lounge earlier this week. The Fed has sought to cushion "changing of its wording or its intentions" with coordinated actions and hyperbole from other central banks. This is the type of behavior exhibited last year when, in seeking to prevent the per Bernake taper tantrum reaction that had occurred previously, they coordinated with the Bank of Japan, the Bank of England and the ECB to indicate or to actually trigger liquidity programs or accommodation. That sought to offset the impact of the Federal Reserve producing accommodation or leverage. This year has been exactly the same.

Clearly, the impacts of a Fed rate hike can set off a firestorm. There are tremendous risks to the creation of as much leverage as been irresponsibly created and to changing the cycle with reference to this leverage.

The primary risk being that the Fed is actually not in control of interest rates, after all and that a shift can take interest rates into their own direction, regardless of Fed desires. In order to make the Fed policy morph into an illusion of rational deduction and analysis based on data, and to facilitate the appearance of markets interpreting a change in policy as an indication of a sound economic environment, it is clear that the central banks were up to old tricks using unlimited liquidity to purchase risk assets on full bore yesterday. This appears to be yet another tactic "doomed to failure" of these irrational, inappropriate and highly risky policies. Indeed, the actions by the central banks appear to have sought to shake bearish resolve and encourage bullish speculation - and these conditions can obviously be seen in the risk markets presently.

The chart below is the market structure projection chart that we have been publishing for months. It has provided a good guide for the general movements of the markets. Recently is become clear that the markets which sometimes will move plus or minus a week to these projections have consistently been leading about a week since roughly May/June. In evaluating this behavior, we are presenting a chart which shows market structure projection both as it has been plotted and published on these pages - the dark magenta line, and also the same market structure projection plot shown offset by one week. As can be seen, especially in the near-term, these projections have been prescient and accurate. We are now entering timing tolerances shown by the boxed areas on the chart below that are probably for an inflection point. This coming inflection point is a very serious inflection point. Its significance implies a turn from up to down in the markets for the next five months or so - with weakness biasing into February and March next year.

Updated Daily/Weekly Market Structure Projections

Updated Daily/Weekly Market Structure Projections

State of the Markets – Weekly Update

Executive Summary:
- Main Trend (weekly): down
- Intermediate Trend (daily): neutral (not confirmed)
- Short-Term Trend (60min&135min): up
- MSP for the week: up

Details:
The weekly cycle is in an impulse down which started in week 35 when the price sliced through the support level which triggered at 2061.75 ES and 17353 YM (point 1 on the chart). The MCM MA confirmed the impulse down in week 36 by also coming down the mentioned level. That means that the main trend is down. Usually the impulse is back-tested before picking up speed and the market is currently doing that, although it has come slightly above the break-down levels (point 2 on chart). The next 1-2 weeks will be critical in confirming the main trend, since if the market continues to move upward the impulses down will likely be reversed. However if the market reverses back below the impulse break-down levels then the current move up will qualify as a back-test and the market should accelerate to the downside. Interesting to note is also the fact that LREs (low risk entries) for shorts have been generated on both ES and YM at the current levels (the red rectangles).

Weekly Cycles

The daily cycles had started a main cycle impulse down back in August when the price sliced below the support level at 2051 ES and 17450 YM (point 1 on the chart). The cycle recently had a BR and an END (point 2 on the chart), which could mean that the impulse down finished at that END. Considering that the weekly cycle impulse down did not finish, the odds are that another resistance followed by at least a 2nd END lower could be triggered. We had a resistance trigger at 2015 ES and 17100 YM, but the market managed to break above it quite significantly. The MCM MA did not yet confirm this break-out. If it does, it will mean that the market will start an impulse up on the daily, which would point to a reversal of the (down) main trend. So just like the weekly cycles, the daily ones also point to the next days as being critical for the market.

Daily Cycles

The 60 and 135min cycles are currently in nested impulses up. This means that very short term it is expected for the market to go moderately up or at least side-ways to allow these impulses to finish. However the 135min new impulse up (triggered at point 2 on the chart) was not yet confirmed by the MCM MA. This means it can still be reversed if the market pulls back. The 60min impulse needs a BR (lower) and a subsequent END at a higher price to finish. So very short term the cycles point to moderately up or sideways, however the immediate next move might be down to allow a BR on 60min. The fact that the upper price of the last capitulation bars (red lines) was not taken out also points to first a retrace followed by possible moderate upside, once the BR on 60min triggers.

60&135min Cycles

 

The MSP for next week points moderately higher for the whole week. Daily MSP shows a top is likely to be found on Wednesday-Thursday. Interesting is that the long term MSP shows we are close to an important top. This should happen in the first week of November, after which there is bias for weakness for 3-4 months. The top could be triggered earlier, since 3-4 trading days earlier would be considered close enough.

msp_25.10._V2

Market Structure Projection

As The Illusion Continues in Large Caps – MidCaps and SmallCaps Appear Troubled

As markets torture bears and the over-abundance of shorts established from the near the lows of August and September, Mid and Small Caps are showing obvious signed of struggle. While there is a possibility of an overthrow of the resistance cycles on the daily charts shown below, this does not likely impact the results that dramatically in that a failure at the previous impulse breakdowns (cyan) is likely to sent the markets to new lows. Ironically a test overthrow of the cycles would fit the MSP published earlier for the equity markets. However, this is NOT necessary and given the profound struggle going on in these indexes versus the Nasdaq, S&P and DOW things can take a turn for the worse at any time and the concept of a left translated turn into the MSP inflection points is a not insignificant possibility.

MidCap and SmallCap Daily Cylces

MidCap and SmallCap Daily Cycles

End of Octobe/Early November Inflection Points

Below is a set of MSP on the markets that we have been showing for months - the projections are irrefutable in that the market has tracked them to an uncanny degree. Next week is very busy in that almost all of the markets reviewed have inflection points of some kind that can trigger starting this week and into the turn of the month - potential inflaction points are suggestive of close monitoring of these instruments.

S&P500 Market Structure Projections

S&P500 Market Structure Projections

Copper Market Structure Projections

Copper Market Structure Projections

US Dollar Market Structure Projections

US Dollar Market Structure Projections

Gold Market Structure Projections

Gold Market Structure Projections

Natural Gas Market Structure Projections

Natural Gas Market Structure Projections

A Chart to Consider…A Study of Price Sustainability

Below, is an interesting chart of a proprietary study of price, sustainability. It is based upon the analysis of prices at which a large majority of technical indicators swing to an unsustainable position for market participants. The cases indicated are calculation of projected prices at which a large amount of popular technical analysis studies reach unsustainable conditions - either trapping people in trades or having them have attempted to trade many times based on faulty signals.

Price Sustainability Studty

Price Sustainability Study attempted

MCM Indexes General Discussion

The MCM indexes are a proprietary product which indicates not only the emotional state of the markets (via the accumulation index), but also the most important components: the dollars added to the market, the stock share directionality and rich vs. cheap tickets. All these provide important information into the internals of the market and whether the action is healthy or there is reason for a more defensive stance. The basic way to use it is whether the AI and it’s components are confirming the price action or not. So in an up day, the AI should be cyan and going up, the cash added should be positive (the higher the better), directionality green and rising and also more rich tickets than cheap ones.
However there are also more subtle signals, which one can rely upon for short term direction. Below is a good example of such signals.

MCM Index Chart

MCM Index Chart

We can see that on the 8th of October, the market started with quite weak internals. AI was magenta (meaning negative), cash added was negative (although close to 0), directionality negative and rich vs. cheap tickets also negative. Right until point “A” the price action was choppy, cash added was also choppy and close to 0, however AI, directionality and rich vs cheap tickets were all trending up. At point “A” the price in the market tested the lows of the day, cash added tested 0 too, but AI was still trending up and nowhere close to the lows from the beginning of the day, while directionality was also positive putting in a higher low, rich tickets being more positive too. Market rebounded, but came again close to retesting the lows of the day at point “B”. At this point AI was already cyan (showing positive emotion) and with the uptrend quite clearly shown; cash added was positive, went a bit down, but never tested 0, directionality was also in clear uptrend, putting in a higher low; rich tickets had a minimum of the day. After this point, the market never looked back and proceeded to finish very strong. AI and its components confirmed the price action and the day became more of a trend day.
The next day, on the 9th, the market opened strong rallying from the open, however the AI and its components were showing that there is something amiss. Cash added was quite low, the AI itself didn’t turn up to follow the price action, being more flat than uptrending. When the decline happened around 10:00am, cash added went to 0 and slightly below, directionality took a nose dive and tested 0 also, and rich tickets were negative as well. After that the market tried to stage a rebound, AI started to trend up and had quite an impressive upward movement, however this was not confirmed by the AI components, especially cash added to the market which remained subdued and close to 0. Point “C” highlights the fact that although AI was cyan (positive) and trending up, the cash added to market turned negative and remained that way. This is a sign that market participants are optimistic and trying to buy the market, however overall money is being withdrawn which means big players are selling into the optimism. This battle finished on that day as undecided, and the effect was a very choppy market which was not able to move much up or down. It has to be mentioned though that when cash added to the market is negative, that usually trumps the AI, and it could have very well ended with a big down day, if cash would’ve started to accelerate in the negative territory.

Daily Cycles General Discussion

On the daily cycles, we can observe that since the beginning of 2015 the market has been just oscillating, meaning moving in regular waves, without any cycle impulses. The cyan lines were marking the start of the waves, with magenta marking the crest. We can see that at point “A” the market did attempt to break into an impulse up, however that was never confirmed since MA never got above the magenta line, and finally the attempt was reversed and the market continued to move in regular waves. In August something significant happened. As highlighted by point “B” the market broke down into a downward impulse, confirmed by the MA. At point “C” we can see that this downward cycle impulse put in a BR (bearish retracement) and later an END, meaning that the impulse is starting to shows signs of completion. It could complete with only one END, although another BR accompanied by a 2nd END would not be out of the question.

The ES daily chart below (from around a week ago) shows basically the same story with the regular waves and then the impulse down in August and the BR and END.

daily charts

Example of Daily Cycles

S&P and DOW Currently Working Bear Impulses are being retests.

Bear Impulse Retests Setting Up a Precarious Position for Market Bulls

This bounce has been a torture for bears and fur bulls alike. If bears think this has been frustrating, it could be promising to be quite frustrating indeed for the bulls. The upward retest of the broken impulse cycle suggests significant weakness lies ahead - weakness that will take out the August lows. Below, is a chart showing the daily working bear impulses. However, the weekly impulses are even more powerful and are in the very early stages. Therefore, significant leave lower prices below the August lows would be implied by those structures.

We are entering the statistically most bearish probability area for flows during this trading month between the 13th and 16th trading days of this month usually triggers outflow. Therefore, it is highly likely the reaction will be felt soon. This reaction can be large or it can be moderate, however, given the scale of this market, a downward reaction that would just be called consolidated could be plausible and in fairly short order to the mid-to-low 1900s and still be considered consolidative. However, keep in mind weekly impulses are rare, they are also potent and imply a pronounced period of selling - which most likely travels well into next year. 

S&P and DOW Currently Working Bear Impulses are being retests.

S&P and DOW Currently Working Bear Impulses are being retests.

 

A Look At October So Far

Daily and weekly market structure projections have provided a decent insight into the markets over the last few weeks. In the chart below, we have shifted market structure projection earlier by a few days. This is tracked well. However, we may be in a larger countertrend pattern such as a rising wedge which would coordinate well with the concept of termination of the pattern towards the end of October or early November. Within this structure is an abundance of skew towards day to day downward price movement. As can be seen in the highlighted box and also the abundance of down projections on the daily MSP. The interesting thing about the daily MSP is additionally that it shows the potential for large spikes upwards within this skew of downwards movement. We have suggested consistently over the last weeks that upward movement may be quick and outsized due to events or Federal Reserve central bank announcements interspersed within a general downward bias. The result of such action can still mean that the market make some forward progress but may be very frustrating to bullish traders.

Daily and Weekly Market Structure Projection

Daily and Weekly Market Structure Projection