The Bear Shows His Claws

Slow week my foot. After yesterday’s train wreck in equities it’s time we talk about the bear as he’s clearly not interested in returning back to hybernation. And more specifically I am going to present you with two bearish inflection points that represent points where getting positioned has the highest odds.

Since I took this snapshot the E-Mini has already proceeded lower which reinforces the odds that we are looking at a more profound sell off over the remainder of this week. Julie was correct in pointing out that low participation will encourage institutional traders to shake out some of the weak hands.

On the volume profile front it becomes clear that yesterday’s rejection lead to a collective sell off that I expect will extend lower. How much lower of course is the key question.

Until we find that out our main mission is to simply assess our odds at various stages of the unfolding correction. Buying blindly here is not simply a foolish but, judging from our VIX components VIN and VIF, also an expensive endeavor.

Jason posted this chart yesterday and I was able to dig up the original post over on SeekingAlpha. It’s a quick read and offers key insights you should be aware of. In a nutshell the author’s point is that margin debt has ballooned to historically unprecedented levels and that a liquidity crisis could be triggered rather quickly should equities correct beyond 20% of their all time highs. The author concedes there are of course no clear rules governing this and that the 20% mark is simply an educated guess.

Well I bite, so let’s see what sort of drop we are looking at here. A 20% drop on the E-Mini futures off our all time highs of 2936 puts us at around ES 2350. Which just so happens to be the range the lower 100-week Bollinger is expected to cross in a week or two. On the monthly that puts us in the middle of nowhere but I have marked both panels for your convenience.

So it seems that we are still quite some ways away from a possible crash trigger in equities. In the interim what we do have are preliminary thresholds like the weekly spike low which also roughly lines up with the still rising 100-week SMA, so about ES 2604 plus minus a few handles. A drop through that one would be rather worrisome and could trigger the second phase of a medium term bear market.

Until we approach any of these key levels I am going to stand by on the sidelines, especially during a holiday week. As I stated above, I am not going to start wildly guessing a low here without any technical support levels I am able to hang my hat onto. If you’re holding short I once recommend you do absolutely nothing as the current momentum favors your side.