For months the stock market has fucked us all around. It’s been boring, difficult to trade, and frankly its worn me out. Evidence is accumulating now, and it’s time to examine it in detail. We may be coming to the end of one of the longest running, most persistent, strongest bull markets in history. Rather than read the crap about Greece and China to death until we confirm our own pre-existing biases, let us look carefully at the character of the current stock bull market, and objectively examine to ask the question “is it intact?”
Exhibit A – this showed all the signs of a strong long running bull market right from the get go. A strong move to kick it off, every pullback being bought, single bar pullbacks. Volatility steadily decreasing, which is a sign of a move with legs.
Objectively what has happened is that volatility has become historically low, while the bull market has weakened. This is a necessary precondition for change of trend. Statistically, overwhelmingly low volatility bull markets end in only two ways
Way 1) Blow off top – think 1999
Way 2) With historically low volatility, a choppy topping process, and gradually falling off the plate, led by historic currency and bond movements. Think 2008
Objectively, in my opinion, for the FIRST TIME IN YEARS, we can rule out number 1)
By definition we are closer to the end than the beginning of the bull. Maybe not right here, right now, but somewhere in the vicinity of it give or take 6 months. Winter is coming.
Now lets examine the weekly chart. Note the failed retest of the highs at that low volatility extreme is very bearish.
Lastly, lets look at the daily chart. I’m going to use the ES index futures here
So at this point what do we have? We have historically MASSIVE upmoves and downmoves, giant gaps, puking and shitting all over my nice clean charts.
Another way of saying that is that “market type has changed” or “this is what a high volatility bear market looks like”
What do we expect in high volatility bear markets? Massive counter trend moves lasting only a day or two, big gaps, everything we are seeing now. And we have a daily setup. Get short on breach of the daily low, stop at the daily high.