Chicagostock Trading

Before politicians or anyone began to talk about "The Great Reset", we titled our article from March 22, 2020 just that.  It was based on the fact that the upside chase since the 2016 election had created a trap in February that was popped by the coronavirus pandemic and fueled lower with longs being forced to liquidate.  The move, dropped the market right into a low of 2174 on March 23rd, resetting all of the gains from the 2016 election and retesting the breakout which provided longs a key level to defend to prevent further losses. 

Things were looking grim.  Coincidentally just when the market reset all of its gains from the 2016 election, the market found its bottom, as bearish sentiment reached a peak and the Fed initiated more programs to support the market.  Technically the 2170 level provided a bounce, however the support from the Fed provided the opportunity to bounce back, and using shorts as fuel to squeeze the market back higher.  On March 23rd they lifted the cap on their asset purchases from $700 billion to unlimited.  They also announced a $300 billion credit program.  

Shorts, who been wrong for years, are starting to get cocky... Is it time for a massive short squeeze?

— Chicagostock🌐 (@Chicagostock) March 23, 2020 

The probe below the prior week lows of 2260 failed to expand, luring in shorts below into a low of 2174 before recovering 2260 to trap shorts and setup a shrot term failed breakdown.  This failed expansion lower forced shorts to cover as sellers lifted and the market bounced back to 2600.  

This was a defensive bounce and short squeeze which led up to the Fed announcing a $2.3 trillion dollar lending program in the beginning of April that held the market maintain its bounce and work its way higher.

By the end of the 1st half the market had retraced all of its losses back to retesting where the bottom fell out at 3225 which was the 6 month reversal window after the bull trap was set earlier in February.  

The 2nd half of the year provided new 6 month volatility windows with the first 2 weeks of July being the opening range that set the tone for July-December.  July saw the market press against 3235 only to see buyers step up in July to break above the 6 month volatility window at 3250 which was set by July's opening range.  By holding above this window, a bullish 6 month bias was established, which saw the market squeeze into new ATHs, recovering the February high, to 3587 on September 2nd, before retracing to retest the vol window at 3250.  Retest of the vol window was defended to keep buyers in control, which was followed by another test in October that also held up.  So long as the market is above this window, buyers that bought the market above are in control and have opportunity to expand the market higher.  With the election of 2020 being out of the way, the market continued higher.  Positive news on COVID vaccine on November 9th  started a new wave higher, forcing longs to chase into new highs as the market created a bullish channel that is being expanded into the end of the year, following through on the bullish 6 month bias that was set in the 2nd half of the year.  

Chase creates risk, as we saw in early 2018 and 2020.  Going forward, as we close out the year of 2020, the new year brings us new opportunities and windows.  The first 2 weeks of January is considered the opening range which can set the tone for the 1st half of the year.  The opening range will also establish 6 month volatility windows above and below the market.  The windows provide the market an area to trade within, or overcome to establish a bias (bullish or bearish) to trend, or become traps if buyers/sellers fail to expand.  In order to establish a bias, 5 daily closes above a window are needed.  Once a bias is established the other side turns into a reversal window.  We like to use these windows to look for trends. We also like looking at the windows to create potential traps, as we saw in early 2020.  Most of the gains came in the months prior November and December, so the break above the upper vol window in February lured in late buyers that failed to expand, thus creating the trap which saw the reversal window at 3235 fail to hold, which forced longs to liquidate, accelerating the downside.  

With the 2nd half of 2020 closing on the highs of the year, the start of the new year will show us if the market can expand on these gains or attempt to correct in search for support lower.  Shorts have been grinded out since the March lows, but also recently since the vaccine news which has also lured longs forced to chase above the September high. Going forward, the low from the vaccine news in November at 3500 is key as losing this would put pressure on retesting the November election and low of 3243.  

Keep an eye on the dollar index. As stocks bottomed on March 23rd, the US Dollar also topped that day, with a high of 10396.  

We wish everyone a healthy, safe, and prosperous new year.

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Since the financial crisis in 2009, the Federal Reserve worked overtime to prime the market with quantitative easing and low interest rates.  The punch bowl was spiked until the music suddenly stopped in February.  Now that the music is off, people are waking up to the fact that the emperor has no cloths.  After a series of hiking rates last year, the Fed cut rates back to zero, and now doing daily $1 trillion dollar repo operations in an attempt to support the market's.  So far it’s not working, and it will not. 

You see when the market bottomed in March of 2009 at 666 and after measures taken to stimulate the economy, the Fed never took their foot off the gas.  This is told by looking at the open gaps that have been left behind. Every attempt to correct, was followed with a higher open that never looked back.  This not only left short sellers on the hook, but forced buyers to chase the market higher.  For bulls, this was no problem, every dip was bought and the overall direction of the market was higher.  The problem with this is that rather than letting the market digest its gains and consolidate before seeking its next move, the upside squeeze was forced and continued through the Fed’s easy money policy.

Needless to say, the actions of the Fed did help the market recover from the financial crisis, providing liquidity in getting the market back on its feet.  The market recovered from its 666 to a high of 1468 in 2012.  In December of 2012 the Fed attached a 6.5% unemployment target to raise interest rates.  The gold market was "spooked", losing 1500 and beginning its correction lower.  The stock market took off in January of 2015.  The market opened higher in January and never looked back. This led to a rally into 2000 in 2014.  The NFP target of 6.5% for the Fed to begin raising rates was reached.  Did the Fed begin raising rates? No.  They pulled it and said the target was outdated.  During the period of 2014 up into the election of 2016 the market attempted to digest its gains and correct, however every pullback into 1800 was met with central banks throwing stimulus at the market.  Why? In 2014 the ECB imposed negative interest rates. In October of 2014 the Bank of Japan surprised the markets with $700 billion in stimulus.  In December of 2015 the BOJ repeated this action, surprising the markets with more stimuli. Why did we need all this aggressive action by the central banks when the markets had not only recovered into all-time highs and jobs numbers were improving? 

The action by the central banks during 2014 into the 2016 election, did not allow the market opportunity to correct in search for support.  In other words, there was no price discovery in the “market”.  If there was no price discovery, was it even a market?  By not doing so, this did not give buyers a chance to get in at lower prices.  Who cares right? If the market continued higher, no matter where you bought the market you were making money over the long run.  Well this created the bubble that were seeing pop today.  The election of Trump in 2016 was followed by aggressive policies that gave businesses opportunity to thrive.  Manufacturing jobs which were dubbed as gone were beginning to return, cutting regulations, and pro market policies led the market to expand away from 2000 into highs of 2878 in January of 2018 after Trump’s first year in office. 

What the central banks did during 2014-2016 by holding the market and not allowing for a correction, gave way for the bubble to be created as the market expanded away after the election.  The market attempted to correct in 2018 after peaking at 2878 in January, falling to a low of 2316 in December.  Volatility returned and buyers that chased the market in 2018 were either shaken out, or took pain as they saw the market go against them. Worried traders and investors began to get bearish.  This turned into a massive trap as the markets put in a V bottom in January of 2019 to set a bullish 6 month bias, expanding the market higher into new highs of 2969 in June of 2019.  Squeezing short sellers and to the surprise of longs, seeing the market recover into new highs.  Once again in the second half of 2019 the market attempted to correct, in August the market established a bearish bias that lured in short sellers, failing to see expansion in October.  As the market attempted to correct, what did the Fed do? Did they allow the market to discover price? Allow it to function normally? Whether it was to correct or not? No.  The Fed announced plans to expand the balance sheet and insisted it was not QE. On November 1^st I asked a question, was a short capitulation coming? I asked this because short sellers from August and October were caught on the wrong side with the market reversing its bear bias late October and those short sellers were fuel to expand the market higher. The market never looked back.  Short sellers were forced to cover, expanding the market up to a high of 3245 in December. 

So after the market attempted to correct in 2018, longs were given a scare, but were saved in 2019.  If they saw stocks go against them, they were given a second chance to get out.  You know the saying, bulls make money, bears make money, and hogs get slaughtered? Well 2019 was a gift from the Fed to bulls to take their profits.  What do you think happened? Did bulls say ok now it’s time to get defensive and take profits? Absolutely not.  Bulls got greedy.

 In an article from CNBC on January 19, it said:

“Investors with $1 million or more in brokerage account are significantly more bullish than they were a quarter ago”

In the article, it states hedge fund billionaire David Tepper saying “I love riding a horse that’s running.” Later in the article he is quoted saying “the market will get to a level that I will slow down that horse and eventually get off.”

Source: https://www.cnbc.com/2020/01/18/why-wealthy-investors-are-increasingly-bullish-on-economy-to-start-2020.html

You think the market slowed down to give him an opportunity to get off? Anyone riding that horse got violently thrown off in March.

After shorts fueled the rally in 2019, the market was setup on the highs to start the year of 2020.  I shared our volatility windows we use to indicate bull and bear levels and 3361 was the upper window.  The market needed to hold above it for 6 days to establish a bullish 6 month bias and doing so would not only lure in late buyers, but force them to defend pullbacks.  As I stated in the article, volatility windows can be used to trap late buyers and sellers.  Once the bull bias was established, buyers got lured in and they were forced to defend pullbacks.  On February 24^th, the market fell into its reversal window at 3225 which was key level for buyers to defend to sustain the bull bias.  By losing this level the following day, the market trapped buyers on the year and this has accelerated the move on the downside because shorts were sidelined and the boat was tilted leaning on the long side.  When everyone is caught on the opposite side of the market, this provides opportunity and fuel to expand the market into the opposite direction.  Not only did the market fall back under the November short squeeze at 3000, but it has fallen below the December 2018 low of 2316, reversing all the gains last year, just like that.  Now with short sellers out of the way and the market trapping buyers in January and February were back to retesting levels from 2018 when the market originally tried to correct.  Anyone still holding stocks is now forced with a dilemma.  Do they take the loss, or hold in hopes of the market coming back?   This is what getting married to stocks looks like.  They are now married to their positions, and their thesis is, it’s a long term investment.  That may be so, but who knows when the market will return back to the prices set earlier in the year. 

For the market to bounce, buyers need to be fearful. You cannot expect the market to put in a bottom if buyers that got caught at higher prices are still cocky in thinking averaging down will play out in the long run.  The long run may be much longer and what is the point of getting into an investment if one is not flexible in getting out and trying to get back in at lower prices? Its greed and it’s becoming attached to a position. Many don’t want to let go of their price average from accumulation over the years, thinking the market will never return back to those prices.  The market bottoms when you are afraid to buy stocks. 

So the market has lost all of its 2019 gains, and the Fed is throwing everything but the kitchen sink at the market.  Cutting rates drastically back to zero, new quantitative easing measures, and none of it is working.  The emperor has been revealed to be without cloths.  They primed the market higher without allowing true price discovery, so now we will be getting that price discovery.  The only thing left to fight deflation is to devalue the dollar.  This is the last tool in the tool box for the Fed, the nuclear option. 

See Ben Bernanke’s speech titled “Deflation: Making Sure “it” Doesn’t Happen Here.”  In these remarks, there were 5 major points Mr. Bernanke pointed out as tools the Fed could use to fight deflation. 

1. Lower interest rates to zero
2. Buy securities from banks to expand Feds balance sheet
3. Increase money supply
4. Buy our countries debt
5. Devalue the US dollar

Source: https://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

The market is now looking to do its repair work from the last 10 years it was not allowed to do so.  Below we will highlight the open gaps as key reference points to the downside.  First major level support test is seen down into 1900 which retests the 2016 low of 1802.  Failure to hold this sees next major level into 1200 to retest the October 2011 lows of 1068, followed by 830-730 to retest the March 2009 low of 666.  Obviously we do not want to see this happen, but retests are inevitable.  It’s just a matter of time. Falling down to retest the low from March of 2009 would mean we are in a very ugly place in regards to our surroundings, jobs, economy, etc.  All thanks to whom? The central banks, for not allowing the markets to function properly by retracing lower before moving higher, but forcing the market up on easy and cheap money.  Kicking the can down the road, well we are finally at the end of that road and there is nowhere else to kick that can too.  Any bounce back to 2800-3000 would be key resistance to retest the bull traps set this year.  The supply caught above in the market is overhead weight and resistance that will need to be recovered by new buyers to recover and reverse. 

Welcome to the new decade. 

Corona Virus popped the bubble, but who blew that bubble in the first place? Had we not pumped this market with cheap money, we may not have reached such upside levels, but the velocity on the downside would not be as great nor the pain it has created.

The sun will come up.  Each time the market was limit down last week, the sun was still up and the birds were still chirping. We’re going through a cleansing in the market and trying to return back to price discovery.  It may be painful, but it is our medicine now to get better later.  Every now and then this takes place, and those that play it smart benefit in the long run. Let the dust settle and you will find the opportunities you are looking for.

The loss of confidence in central banks may cause people to reconsider how they are structured.

The following charts highlight the major downside gaps left open. Gaps are created when the market opens above or below its prior low or high.  Fueled by easy and cheap money, the market did not fill these gaps during the time, forcing buyers to chase.  These are key reference points for the “market”.

11/04/2016 Open Gap 2086.50

06/28/2016 Open Gap 2029

06/27/2016 Open Gap 1994.50

02/12/2016 Open Gap 1860.75

02/06/2014 Open Gap 1769.75

10/09/2013 Open Gap 1656.50

03/04/2013 Open Gap 1526

12/31/2012 Open Gap 1425.75

11/16/2012 Open Gap 1360.50

06/05/2012 Open Gap 1286.75

12/19/2011 Open Gap 1201.00

11/25/2011 Open Gap 1162.75

08/31/2010 Open Gap 1053

07/14/2009 Open Gap 903.50

03/09/2009 Open Gap 677.75

The SP500 established a 6 month bullish bias in February which lured in buyers that were used as fuel to expand the market lower.  We wrote an article late January on the 6 month volatility windows highlighting a failure to sustain a breakout over a volatility window had the opportunity to trap late buyers, similar to what took place in January of 2018.  

You can read more about it here: SP500 6 Month Volatility Window Update

What's taken place has been almost identical to what happened in January of 2018.  Both times the market was coming off a major rally and the upper vol windows were used to lure in late buyers that failed to hold the market, developing into a bull trap that was reversed.  Current action has been sparked by Coronavirus, but the fuel that's expanded the market lower is trapped buyers that failed to hold the year low. Dip buyers failed on February 20th when the market broke below its 3D pivot range, breaking its upward momentum.  The following day on Friday, February 21st, the market fell below its 6 month vol window of 3361, which left buyers above on the hook. Monday's trade on February 24th gapped lower, trapping buyers above as it fell into testing the 6 month reversal window of 3225.  Dip buyers coming out as heroes in attempt to buy the dip (which worked so well until it failed on 2/20) failed to stop the market from reversing.  Too many longs were caught at higher prices and not enough buying to sustain the drop.  Since the door opening at 3225, the market dropped into the October low of 2855 before a defensive bounce up to a high of 3137 in March.  By falling short of the January low of 3181, buyers on the year are still holding the bag above. By holding below the reversal window of 3225 for 6 days, the 6 month bullish bias has been reversed, creating overhead supply that is acting as resistance as rallies are being sold.  The velocity to the downside and failure to hold support levels shows a lack of demand from new buyers. This is what happens when buyers are forced to chase the market, when it does come down, there are not many left, which lead to failures. 

Futures went limit down in Sunday's trade, falling 5% to a low of 2819. Once again dip buying heroes tried to step up, only to see the cash market on Monday trigger another halt with the market falling 7% before opening to see a flush into 2715.  This is what trying to catch a falling knife looks like. Tuesday's trade clipped the recent low of 2715 down to 2695 before bouncing back to retest last month's 2853 low that was lost this week.  This will be a key level for buyers to overcome for a shot at last week's failure at 2970.  Failure to overcome 2850, leaves the market vulnerable to continue trading lower, in attempt to expand lower to retest the breakout from 2500, which provides key support for buyers to defend the December 2018 low of 2316. Buyers who did not chase the market earlier this year and double down, can take advantage of the opportunity of that retest.  Whether it holds is another scenario, but the first test of the level provides buyers opportunity to defend major support from the December 2018 low.  Going forward, any rally back to the reversal window of 3225 will be key resistance for sellers to defend and buyers to overcome.  With supply being caught above, this will make it tough for buyers to recover as new buyers will need to step up to attempt to recover trapped buyers from earlier in the year. 

Looking at the weekly chart above, you can see the market broke above its resistance trend line from higher highs in November of 2019.  This was fueled by shorts that were caught in August that failed to expand lower.  The market reversed its bearish bias on November 1st, trapping shorts and using them as fuel to expand higher. As seen in the weekly chart, you can see the expansion, led the market to break above its resistance trend line, forcing shorts to capitulate, and setting up this year with a higher market that lured in the late buyers that are now caught with the market falling back below. Shorts squeezed end of last year, buyers lured in this year, the downside velocity has increased because longs have been caught on the wrong side and shorts have been sidelined, which is forcing short sellers to chase the market lower.  First major support met at 2500 to retest the December 2018 low, this will give buyers who did not chase this market opportunity to defend that retest.  Failure to hold the December low, sees next major support into 2200 to retest the election low of 2028 from November 2016.  This is how the market moves, when more buyers or sellers are caught on wrong side and are used as fuel to expand the market in the opposite direction.

The Fed cut rates last week, but it was not enough. Soon they will be down to 0%, but that will not be enough either.  According to Ben Bernanke, the Fed has one more tool in their tool box, which is devaluation of the US Dollar.  If you STILL don't believe this can happen, take a look at what the US Dollar has done this year.  We warned of a bearish pattern that was developing in the US Dollar Index monthly chart in December.  If you look at the pattern, the market topped out when President Trump took office.  It has spent the last 2 years coming back in attempt to retest that failed breakout above 100.  This is a major resistance level the dollar will have to overcome for another shot at the 2017 high.  Failure to overcome puts in the lower high and sets up a failed retest that can lead to lower prices.  Obviously no one wants to see the dollar devaluated, but if things get ugly and cutting rates no longer work, it is an option the Fed has and it's better to be prepared for it then not.  Gold is benefiting and already recovered where it failed in December of 2012 when the Fed hinted at higher rates. Here we are, 7 years later and instead of higher rates, they're back to cutting.

Will President Trump Devalue the US Dollar?

2018: The Year of the Bull Traps

January 2019 Bullish Cup/Handle 

November 2019 Bearish Bias Reversal

January 2020 Bullish Bias Trap

To start off the first half of 2020, the 2 week opening range in January saw the market make a high of 3263 before correcting down to 3181, once again seeing sellers fail to expand lower as the market reversed off this low to overcome 3263.  Taking that range of 3263-3181, gives room up to 3345, and as the 2 week opening range closed out last week, the market came close to this with a 3330 high.   With the 2 week opening range now completed, we have a new set of 6 month volatility windows and pivots for January – June 2020.  The 6 month volatility windows come in at 3196 x 3361.  In order to establish a bullish or bearish 6 month bias, the market needs to close above/below the vol windows for 6 trading days.  Only one bias can be created, once a bull or bear bias is created, the other side turns into a reversal, as seen in the 2^nd half of 2019.  Sometimes volatility windows can also be used to trap late buyers and sellers.  Since we are coming off a reversal expansion since November from 3035 up to a recent high of 3335, the upper vol window of 3360 will be key as to what the reaction to the level will be.  Will the market stall and run out of fuel into testing this level, or will it be able to hold above for 6 trading days to establish a bullish bias and lure in buyers above.  Buyers will be forced to defend pullbacks in attempt to continue trending higher.  Failure to sustain the breakout over a vol window has the opportunity to trap late buyers above, similar to what took place in January of 2018 https://twitter.com/Chicagostock/status/959475640910209024.

When President Trump was inaugurated in office, the US Dollar topped out with a high of 103815 in January of 2017.  In March of 2017 we wrote, "Will President Trump Devalue the US Dollar", highlighting Trump's comments about the currency, as well as the Bernanke's comments of dollar devaluation as a tool to fight deflation.  One year later, February of 2018, the dollar made a low of 88150, falling 15% from its January 2017 high.  For the last 2 years since this low, the market has worked its way higher in attempt to retest the failure in January of 2017.  The retest is technically major resistance for sellers to defend and buyers to overcome.  Thus far, the dollar has put in a lower high and is slowly backing away. Going forward, the dollar will need to overcome 100 for another shot at the high.  Failure to overcome 100 leaves the market vulnerable to continue falling in attempt to retest the 2018 low which is considered the neckline for a large monthly head/shoulder topping pattern that has developed.  A head/shoulder topping pattern is created when the market takes out a prior high to make a new high (01/17), failing to expand on the new high and falling back to take out the prior low (05/16).  By taking out the prior low, the breakout into the new high is considered a failed breakout. The low made after the breach of the May 2016 low is considered the neckline at 88150 as the market has bounced off this low in attempt to retest the failed breakout.  Breach of the neckline will be key. As breaking the neckline can see sellers chase the market to force expansion of 15.665 range (103815-88150), down to 72485 (88150-15665). The precious metals markets (gold/silver), have already seen a recovery as they have broken away from their multi-year downtrend.  Gold squeezed back to retest the Dec 2012 low of 1520, and has taken a pause since then, consolidating the gains.  Any further weakness in the USD would provide opportunity for the precious metals to push past these resistance levels in attempt to retest their highs.  

Reference: Will President Trump Devalue the US Dollar