The post below is an excerpt of notes Mella sent to clients this week. I think it’s too good not to share:
Some observations on the recent market action.
What defines a bull market? Price clearly, it goes up right, and remains fairly stable. Volatility is low and up we go. We have been in a strong bull market since 2009 lows as we know and have noted the US election lows took us on a parabolic journey to bear hell. Taking aside the price movement since the election, markets have had healthy pullbacks/retraces and corrections and the charts/indicators etc remained accurate and the premise was to buy healthy dips. Vix would throw little fits but it would quickly settle.
So what defines a bear market? Well price goes down aggressively and volatility is extremely apparent. Now i joined these markets in 2009 right at the lows so i have not been witness to a bear market or how it trades. But knowledge tells me that price remains extremely volatile and stressed, with large intraday swings. This week’s price movement without a shadow of a doubt is bear market action. I lost count of the price movement range. And volume has stayed elevated.
Look, my mantra for about a year has been these markets are “oh so bullish but oh so bearish” Well the oh so bullish move played out. It ripped every single bear’s head off and made all intellects look dumb. This wasn’t a healthy correction guys, this was a crash. The “oh so bearish” part is playing out. And yes im saying it IS playing out, not HAS played out.
Remember i’ve said it many many times on the way up. The fact that the charts where “broken” (meaning nothing worked) was highly bearish, NOT bullish. Oh and trust me, charts will be just as broken if indeed this turns into a bear market.
Look guys, i’m concerned. Very concerned. The instilled habit of buying every dip will end up hurting people on the way down. Our psychology has been affected because we have been programmed to buy every last drip. And this same psychology has hurt many on this move. Causalities here are already high and there will be a lot more. That $XIV move is a massive massive warning IMHO. It fits with all my concerns over the last year. This type of move can happen to any instrument.
And worse, where the hell was the PPT? No circuit breakers, nothing. This move stunk, but just like i mentioned yesterday on stream, the fact that the cavalry never showed up means this move was manipulated. Utter utter bastardery.
It’s almost ironic that Sven has come out with “retiring the bear”. From my perch IF these markets don’t settle then i become full bear and as I outlined on stream several days ago it’s already acting like it:
I had said that no one would totally capture this move and bears would cover too soon and this is apparent, even on our part. There’s absolutely NO WAY one can correctly trade these markets especially when the bull program has been so fierce for TEN years. A trader’s job is to limit losses and to try and capitalise on the middle move and i think we’ve done a great job here.
So what now?
Well we have to really monitor charts. What worked during the bull market needs to fail. So those stupid 15min charts can hopefully be thrown into the bin, the 2 hr charts need to fail and we need to see if bear patterns form and PLAY OUT. The $VIX needs to be watched like a hawk. This week i posted a possible bull flag forming. My old assumption has been that below 25 $VIX is a bull market and above 25 is a bear market. So the question is, does the $VIX cool off a bit and continue higher or does it go back to its old pattern and the bull market resumes.
I think it’s way too early to tell , but in the meantime, as far as I’m concerned, these markets are on high alert and remain massively dangerous. Stepping back like i have is also a position. Please be careful. My stance here will be to revert back to more technical set ups across the board with metals/currencies etc until all this calms down.
For the latest public analysis please visit NorthmanTrader. For our market products please visit Services.