May 9th, a bottom but not a protean base, and May 10 a rally: NYFANG:SPY ratios updated and closing bell….

Prices were down 2% in stairstep fashion when they got near 400 the sellers were exhausted, and only mile one of a bear market marathon. The money seemed to anticipate the move. Can it hold? There’s a short term resistance line at 412 1/2. Nibbling SPY call spreads here. This looks like it was planned ahead of time. Algorithms are fast but they aren’t very creative. The way the gold miners are getting pummeled this is the end, or just the beginning. The case for money flows on the daily chart is good, but that might not be any help, it may indicate there is a lot of pain to be had when the institutions finally capitulate.

In short hand today is Monday and dropping them 2% in the morning may imply that Tuesday is going to be a lot worse, and historically Tuesday has a special place in Bear Market legend, and a really bad Tuesday starts with a lot of selling in the previous sessions. So they have an interest. I say they, when the market crashed in 29 JP Morgan tried to buy it back up, and lost a fortune. He was only feeding the margin clerks.

The Tuesday AM rally looks like a shot across the bow-tie. The bears haven’t flinched. So here’s the story SHORT: This entire bear market so far has been selling in the FANG stocks. The ratio of the NYFANG index to SPY has been dropping hard. Now maybe we have a bottom. The point and figure needs to start a 3 box reversal. That would be 1260 in the ratio and we are almost there.

The average size of the column of X’s in this cycle, is 8 and that would take the ratio back to 1310, which is still short of the 200dma and the previous high. Comparisons in ratio charts should not be taken literally, but in combination all of these things help paint the picture.

Should we somehow fail to get a reversal column of X’s here, and should we go lower on the O’s that would be technically bad for the markets. The difficulty is that any rally will need to be primarily in the FAANG stocks. For those wishing to get out of their SPY positions, this chance to sell is not offering much. The SPY set nicely on my support line, which is just below the big number 400, and a good a place as any to make a stand. It’s just that so far they are only buying the index and not the FAANGS.

Money flows in SPY OBV broke out and have fallen back down, below that downtrend line and MFI is not moving today. Maybe the calm before the rally. I would think that if we are going to have a rally they would be buying the leaders who are also the most beaten up, but they AIN’T

There is candlestick pattern for identical red candlesticks, although if you considered the move this AM you could interpret this is as a “falling three method” which is bearish. Support is holding, and my own interpretation of two identical days merged into one, would be a doji. A DOJI signals a pause in the action, the SUPPORT line tends to confirm that action, and clearly the money flows have no positive trend or influence at this stage. Might we wake up tomorrow and find the futures limit up.

Yeah, here’s the thing about this, the money flows aren’t underscoring this selloff. That’s because the sellers are dumping FAANG shares and gutting the index. And the futures action, which includes overseas interests, are also working in here. Recall the SNB buys and holds US stocks, if this goes really south the Swiss people will selling pencils from a can. They don’t want to sell those assets are codified to use the term another way. Make no mistake assets can lose can gain or lose value without market selling and buying. In any case the loss of value in the underlying currency is one cause, a downgrade in sovereign debt might be another. The compensating action then is to buy derivative insurance, or enter the futures market. When interest rates head higher the cost of derivative insurance rises as well.

So item two, if you are certain this market is all about psychology, well maybe not. Should enough sovereigns and offshore holders of US assets push the valuation envelope (lower) then the psychology on the ground will change. When the psychology changes the bullish traders are not rushing back in to capitalize on the Fed put.

As an aside options premium is high and when volatility goes higher the automatic pricing mechanism, (Black Sholes) rises as well, and that has pretty much been the case, despite the ripping bear hole in this market Calls are expensive. However in the last few days I spotted a few openings, and stepped in. I know the market was discounting the Call options because a bit later when prices rallied, the premium went back to fairly (over)valued. Usually when the market is discounting premium you should not be buying, they know more than we do. And those calls will probably expire worthless.

What I expect here is some sideways action, a lack of buying momentum, and another drop, one two three step. So I am short term long the SPY and short some other stuff which is more closely aligned with downtrending leaders in this bear market. On an interesting note two of the FAANGs have met their BEARISH OBJECTIVE. The ratio mentioned earlier, NYFANG:SPY, had a four box bullish reversal today, and the average is eight, the median is five, but the two reversals off their recent lows (so far) are 10 or more.

A rally in which they buy the FAANGs and they buy the SPY index could be pretty compelling since the selling has been primarily in the FAANGs. In the current economic environment that seems unlikely.

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