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U.S. Market: Are Markets setting up for an Early October Surprise?

October 3rd, 2017 · Chris Vermeulen · 12 Comments

Many analysts have recently warned that the US markets are setting up for a potentially massive correction, 40~70% some warn.  Our own analysis has shown massive market cycles that correlate with an October market correction.  Our VIX cycle analysis indicates that we should be expecting a spike in the VIX right now (within the next 3~4 days).  What does all this mean in reality for the average investor?

As investors, we have to determine the amount of risk compared to the amount of potential gain in any trade.  Our job is to measure this relationship properly and to attempt to find opportunities in taking risks for an adequate amount of gain.  Often, this business is difficult to manage expectations and presumed risk factors for traders.  We’ve been trading, combined, for over 40+ years and have learned that the markets don’t always do what we expect them to do.  A perfect example is our most recent VIX Spike call for Sept 9th ~ 12th.  Even though our analysis was valid and accurate, we did not see the VIX spike levels we had projected to happen – such is life in the markets.  We strive every week to deliver superior analysis, trading triggers/alerts and daily markets updates to our clients.  Right or wrong, we live by our abilities to call successful trading triggers and provide timely and accurate market research.

Right now, a number of US major markets are setting up with divergence between price and common technical indicators.  Because many investors fail to even review or focus on longer term charts, very few may be aware of these setups.  Given the size and strength of the recent moves, we are not making predictions regarding the downside price potential (although it could be substantial).  We are simply pointing out that these divergence patterns are setting up in a number of US major markets and we believe this is a significant correlation pattern of a future event.

This Daily NASDAQ chart provides one of the clearest examples of the divergence patterns.  Price has continually tightened within an upward sloping trend channel and has recently formed a bear flag formation.  MACD has related multiple divergence tops over the past 3+ months and RSI has hovered just above 45 throughout this trend to support the upward move.  As washout high reversal early this week would be a perfect setup for a divergent reversal. A prices spike a bit higher early this week followed by a deep market correction.

 

Chart_17-09-28_13-29-24

 

This second chart of the ES provides even further evidence of the setup.  This chart is a Weekly ES (S&P) chart that shows the divergent price action going all the way back to February/March of 2017.  The cyan blue trend channel (support level) is clearly our potential downside target and the RSI is continuing to hover above 58 as this trend continues.  Could the extended divergence be warning of a potentially massive correction?  If so, the RSI would quickly fall to below 50 and price would attempt to retest the support channel (-200 pts from current levels).

 

Chart_17-10-01_ES_W_Div

 

The following chart of the INDU, again, shows the US majors are all setting up in a similar pattern.  One can clearly see the continued divergence price pattern from early 2017 and the continued RSI support above 60.  The confluence of these divergence patterns is causing us to be concerned of a surprise price rotation in early October.  We’ve seen what we call a “washout price rotation” happen over and over in the markets near critical tops and bottoms.  The telltale signs of these moves is extended weakness of a trend (as indicated by the MACD divergence), technical failure (which would be the resulting RSI breakdown) and a moderately high volume “last price advance” followed by a clear and quick price reversal (the “washout setup”).

 

Chart_17-10-01_INDU_W

 

To further assist you in understanding this type of setup/reversal, we’ve provided a clear Intraday NQ Washout reversal setup for you to see what it looks like.  This is a nearly perfect example of bigger volume and price range at the end of a trend (what we call the exhaustion move) that sets up the new bullish trend.  You can see the NQ market had been moving lower and had been consolidating briefly.  Just before this washout move, it appears the market was “pausing a bit”.  Then, seemingly out of the blue, a big down move generated lots of renewed interest from sellers.  Only to have that “exhaustion move”, or what we term the “washout low” to sucker in the sellers, stop out the longs and, eventually, continue much higher.

 

 

 

Could this be setting up this week with an early Monday/Tuesday washout high price rotation in the US markets?  Could this be the setup reversal that coordinates with our VIX Spike trigger?

Two items we will be watching early this week are the NQ (tech heavy and usually an early indication of any general market weakness) the XLF (US banking sector).  The recent hurricanes and natural event disasters are surely to take a toll on the US consumer for a while.  Recent news has suggested that consumer spending is flat in certain areas and that GDP may flatten out a bit.  We assume delinquencies will begin to skyrocket based on displaced workers and jobs over the next 6+ months.  This leads us to believe a market correction would be a natural, and healthy, event in the immediate near future.

Markets just don’t “go up” perpetually.  This recent move higher has been one of the longest in history to not see a 5% or greater correction.  Markets need breadth in order to have healthy rotation and we are simply not seeing it recently.  This is why we believe any rotation or correction at this time could be bigger than most think.  Possibly retesting 2016 lows.

 

Chart_17-10-01_XLF_Washout

 

Notice the similarities in all of these charts.  It is almost like everything has been running on autopilot in terms of price appreciation within the US majors.  We do not have any indication of a sell trigger yet.  We would warn investors to be cautious at this time and to protect open long positions.  We do believe a price reversal in these US majors will begin before Oct 19th and quite possibly as early as October 4th or 5th.  Any moderate price advance early this week followed by immediate price weakness and rotation could be the setup of a much deeper price move.

If you want to continue to receive these types of detailed analysis reports, timely market triggers and analysis as well as Daily market updates, visit www.ActiveTradingPartners.com today and see why our members continue to value our content.  We are dedicated to assisting you in making better trading decisions and seeing what is in the future with our detailed market analysis and research.


12 responses so far ↓

  • 1 Greg Atkinson // Dec 2, 2017 at 10:18 am

    As of today the U.S market is above 24,000 and it seems the “Trump rally” might keep running into 2018? However in regards to timing, it does seem the markets are overdue for a correction and there are plenty of issues out there that could trigger one.

  • 2 lachlan // Dec 4, 2017 at 5:09 pm

    Greg I thought I might buy a bear etf on the asx just for a giggle but hoping for 6200/300 first to defray the risk a little since we’ve got a good resistance spot overhead at 6800 odd and a lot of support at 6000. If it wasn’t for the DJ being so stretched… and these crazy cryptocurrencies (maybe not correlated in price but possibly correlated to the financial policies of the times) then I wouldn’t even be thinking that way though. I’m not sure the xjo will get to 6200/300 of course.

  • 3 Biker // Dec 5, 2017 at 10:19 am

    Lachlan: :…these crazy cryptocurrencies…”

    Yes, our eldest bought nine bitcoin at $300 each, for a giggle.

    Who know where this craziness will end!~

    We remain in cash, despite low interest rates. I have done well on Int shares in my Super, this year… but the US situation is tenuous to say the least.

  • 4 lachlan // Dec 5, 2017 at 7:30 pm

    Biker at the time Ethereum started off back in 15 or so I tried to buy it however its required too much download for our country location. I don’t particularly believe the claims of the devotees on these things. I just noticed the big fish were backing it and thought i’d throw some dollars into a potential bubble. It would have made us very well off. However after I couldn’t get in easily I backed off and didn’t even take any notice of it again until recently. The whole thing is quite a spectacle. My own fault though, however I still made some good money elsewhere.

  • 5 Biker // Dec 6, 2017 at 3:35 pm

    Ethereum? Hadn’t heard of it, Lachlan, but I’ve just googled its rise from zero to today’s price. Pretty amazing.

    Interesting report here, too:

    http://www.watoday.com.au/business/markets/miner-bitcoin-miner-s-shares-rocket-2-400pc-after-cryptocurrencies-move-20171205-p4yxf0.html

    Meanwhile, to quote our respected source: “I suspect it’s going to end up a lot like the internet bubble. BIG rise, BIG collapse, followed by many years of rebuilding into something decent.

    There’s massive FOMO (fear of missing out) going on in regular
    people’s eyes, and I don’t think they understand that many of the technologies are outright scams, or that the price is way ahead of the fundamentals.

    It’s going to be many years of engineering before it can have any chance of hitting the sort of scale that Visa has. We’ll see where it goes- but I think a lot of people are going to lose a lot of money whatever happens…”

  • 6 lachlan // Dec 7, 2017 at 5:07 am

    Yeah I don’t like buying anything that’s already expanded exponentially in price. Now that these currencies have actually got a lot of capital in them though I will concede that its possible they will succeed at becoming mainstream payment systems. Possible. Anybody wanting to play the game should at least be waiting for a big crash to enter. The only non-business or real estate investments I currently have are my small cap gold/lithium giggles 🙂

  • 7 Biker // Dec 7, 2017 at 9:57 am

    Lachlan: “Yeah I don’t like buying anything that’s already expanded exponentially in price…”

    I agree. Stopped me jumping into Argosy, in fact. It doubled while I was researching it!~

    I also tend to follow Buffett’s advice re ‘not buying what I don’t understand’… . Rules out MOST options, though!~ . 🙂

  • 8 Dave M. // Dec 9, 2017 at 12:47 am

    I completely agree with this statement: “…and have learned that the markets don’t always do what we expect them to do.” That is exactly what’s happening in the US Market now. The correction is well overdue, technically, however we are in the strongest quarter of the Year along with the ‘window-dressing’period. Look at the prettiest September rally, never looked back. In my opinion the end-of-the-year rally is going to carry into 2018, at least till March. Also, Bears might sleep well, until the Yield Curve really starts to flatten. Thank you for such an informative post.

  • 9 lachlan // Dec 10, 2017 at 4:30 am

    The things we don’t understand Biker….yeah.
    Few assumptions
    1/the rate of technological change
    2/the diversity of investment and channels
    3/complex regulatory frameworks
    Conclusion… we are going to have no way of claiming to be well informed on anything but a very narrow range of investments.
    So I’ll just leave bitcoin to the experts (unless I need it for payments one day). Good luck to them. Hope they change the world. I have my own little empire to keep in order.

    Just referring back to the article, the VIX has remained flat https://www.marketwatch.com/investing/index/vix/charts
    Obviously a space to watch along with the indexes.

  • 10 Biker // Dec 13, 2017 at 3:23 pm

    Enjoying ‘Start Up’ on Amazon Prime, now that AP is available through our AppleTV. This entertaining drama documents the rise and fall of a fictional cryptocurrency, GenCoin*… and has helped us understand some of the issues.

    Meanwhile our media seems to suggest that the RBA may consider a uniquely-Australian cryptocurrency some time in the future. Hellzapoppin’!

    * Googling GenCoin results in a spate of interesting (all fictional) values… . Good 4alaff!~

  • 11 lachlan // Dec 14, 2017 at 5:05 am

    Holy cow Biker. The worlds gone mad. Now my colleagues are trying to buy bitcoin. Id buy the aussie coin though. Ha ha

  • 12 lachlan // Dec 14, 2017 at 7:45 pm

    The latest sounds negative Biker.
    http://www.abc.net.au/news/2017-12-13/rba-talks-down-chances-of-electronic-australian-dollar/9254380
    But ya know, things aren’t always what they seem. I’d keep my eye out for that Aussie crypto anyhow.

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