It's Only A Whipsaw – COMPQ

Four weeks and trillions of promised yen later, some of the U.S. equity markets are at all-time highs – again – from the multi-asset class volatility that shook the financial markets violently on October 15. Let us remember, the Dow dropped nearly 500 points on an intraday basis, the VIX spiked above 30 and the 10-year yield briefly punched below 2.00%.

All such trading action speaks to a wild and out-of-control repricing of risk also known as fear. 

It is said that fear knows no bottom, but this bout of fear found a shallow bottom as word apparently began to trickle out among those in the know that the Bank of Japan would be announcing additional stimulus measures in the near future and what would essentially serve as a “QE4” and help pick up where the Fed left off.

We know this because a shared chart of USDJPY and the S&P shows it rather plainly.

It would be naïve to think that both just somehow found unknown support on October 15/16 and this is particularly true considering just how badly the S&P’s 1-year+ uptrend had been breached with the month of October taking the index well below that area of ascending support.

Truth be told, this chart doesn’t show how bad the S&P’s uptrend breach is considering it does not show its true QE3 start in the fall of 2012. This is another way of saying that the technical damage done to the S&P between mid-September and mid-October was bad and probably bad enough that even the actual delivery of tens of trillions of yens is likely to offer any real help over the medium- to long-term.

Interestingly, however, this may be true of the near-term too considering that all of the major U.S. stock indices appear to be showing what is just another whipsaw up within an increasingly wild sideways range.

And this makes sense relative to how QE has worked in the past with the promise – think Ben Bernanke in Jackson Hole in August 2010 – delivering the bulk of the intended reinflation rally than the actual accommodation. This was true too around the anticipation of Abenomics and then the actual delivery.

What the charts are showing now is a bit different than those scenarios for sure with the BOJ’s stimulus looking like a temporary salve on a deeply festering wound.

Why? Because the recent rally up appears ready to collapse back on itself in trading action that would simply categorize the last month as yet another greed and euphoria phase ahead of some fear and panic.

This is demonstrated well by the SOX with this year’s sideways trend showing rather plainly in this semiconductor index.

Unless the SOX rises above resistance, its broken uptrend remains very much in effect and as one of the stronger QE3 rally sectors, this should be of concern to investors considering that broken uptrends have historically led to severe downside reactions. In fact, this chart makes the strong suggestion the Nasdaq Composite’s recent move up is likely to only prove to be temporary too.

A part of this neutral-until-broken sideways trend has taken the shape of a bearish Broadening Formation in the COMPQ, DJIA, DJT and S&P and it indicates the likelihood of this whipsaw up being followed by down before the whole thing likely breaks down.

This is worth noting. All of these up and down whipsaws of euphoria and fear that have so many market participants so excited mean very little alone from a technical standpoint. It is the reaction out of this uncertainty that counts and Broadening Formations almost always break to the downside.

As can been seen in the daily chart of the Nasdaq Composite on the following page, this tech heavy index appears to be near near-term resistance where selling pressure is likely to set in and push the Nasdaq Composite back down to the bottom of the Broadening Formation and what appears to be the floor of an ascending range.

Appearances can be misleading, however, because it more likely that the Nasdaq Composite is trading in a medium/long-term bearish Rising Wedge with this index having failed to touch its top over the last 9 months.

In turn, all of these technicals suggest the Nasdaq Composite is likely to swing down in the near-term soon and then correct in the near-term as that small Broadening Formation – and just a small portion of a larger such pattern – likely puts in the downside reaction. Needless to say, this deceptively bearish chart suggests that big selling is ahead.

But perhaps the chart that best demonstrates the likelihood of a swing back down is the only index that rose on a legitimate pattern – and Inverse H&S rather than the tricky V “Bottom” – as shown below.

This chart has pulled lots of tricks over the last 12 months as investors have been swung about by uncertainty around the fundamentals and the Fed, but it very clearly suggests that the sellers are slowly but surely taking control to set the stage for what may be a rather stunning corrective event.

Should this prove true, one thing will become very clear, very fast about the recent rally: it’s only a whipsaw before another likely swing back down.

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Courtesy of http://www.peaktheories.com