Last week I covered the wedge break in my morning outlook:
And when the wedge broke the market did fall and down came equity prices FANG and all.
$SPY dropped over $12 in two sessions. The Nasdaq fell even further. The Dow Jones Industrials fell over 1,100 points in two days. The market has put in more 'close at the session lows', than all of 2017! After years of relentless upside and subdued volatility 2018 is showing its a year of change for the markets.
When will the most recent bout of downside end?
In that same market perspective piece from last week I noted the wedge break was bringing two $SPY levels into focus. One broke solidly on Friday:
The other, the 2018 lows, are a little over $6 away. While I am not sure the 2018 lows will get hit, if the $SPY weakness continues to that level, we could see a sharp reversal. A great set-up for a reversal would be a test of the 2018 lows, followed by a swift momentum shift. Over the last 5+ years the negative to positive momentum move has been a very good indicator that the market has bottomed and is ready to embark on a sharp, short term price recovery. Almost all of these recoveries have ended up at new all time record highs.
Speaking of record highs, the Nasdaq is a little over a week removed from fresh record highs. And this came after a tumultuous early February that had those same uber bears that are calling for a 1929 scenario today, calling for a top back then. If we've learned anything since the lows in March 2009, the tops are made to be broken. And when the uber bears are out comparing the market to every other crash since the dawn of man, odds are we are much closer to a bottom than everyone thinks.
What type of momentum swing am I talking about?
The move off the 2018 lows is a perfect example of this. The negative momentum over the last few years has been quick and fleeting. Perhaps this time its different and a break of the 2018 lows will tell us that. However a hold of the 2018 lows coupled with a swift momentum shift will give us a nice double bottom, and perhaps later this year we will be calling the early 2018 action a great buying opportunity.
The $SPY heading into next week is very close to the negative momentum that we saw during the 2018 lows in February. As such I think there is chance we put in a higher low this week before resuming the unthinkable.... more record highs.
The $QQQ is a little less ominous, and actually came down to some long term support I've had up for quite a while.
and lets not forget about the small caps. $IWM has been a leader since November 2016. With the market trading lower some 8 sessions in a row heading into the Election week, on the 9th day $IWM closed positive, despite a negative day overall for the market. The following Monday the market was up over 1% and we all know how it fared from there. Small caps went on a frenzied rally after breaking that 8 day losing streak and rallied some 15 days in a row.
Notice on the chart for the November 2016 bottom and move higher for $IWM. That election rally met resistance right at the level $IWM found support this past Friday.
For the market bull out there who loaded up on calls and long positions into Friday's close the $IWM chart offers you the best scenario that we saw our lows on Friday and the market is poised for a recovery this holiday shortened week. If $IWM can hold this $150 level, we could be looking for another swift move back to $160.
What do I think?
The action in 2018 should be welcome for those who are looking to see higher asset prices down the road. A pull back like we are seeing to start 2018, from my perspective, is eerily similar to the one we saw in Jan/Feb of 2016. At that time market bearishness was palpable, just as it is this weekend. 24% bulls 76% bears back then. The move in early 2016 was supposed to be marking the end of the rally from 2009.
(The sentiment readings for $SPY at http://www.stocktwits.com )
Instead that excessive bearishness ended up being a great contrarian buy point for the market. We saw the next leg higher for stock prices, with record highs coming at a fast and furious pace.
The $SPY put in just ONE red month over the next 23 months --->>
And two years later the 24% bulls had thrown in the towel morphing into a 79% bull. An overly enthusiastic view of the market. And why not? With prices going up every single month, saying the market was going to go higher meant you were going to be right.
Which brings us to today's market. Those near 80% $SPY bulls at the January record highs have turned into 47% bulls today. 
That's a 40% drop in bullish sentiment from the start of 2018 and a good thing if you are a bull. You don't want 80% of the market bullish, just like if you are a bear you don't wants 80% of the market bearish.
That CNN fear and greed index?
If you think CNN's market data isn't fake, the Fear and Greed Index is at an EXTREME. It's at panic levels. Yet the action this past week wasn't panicked. The streets around Wall St. weren't littered with News trucks like in August of 2015 when the market flash crashed.
And finally the VIX, the supposed 'fear index' could not even break the levels it saw during the most recent pull back. Not exactly panic but clearly elevated. And why not. Prices are moving again. Premiums on the S&P500 should be higher, and the VIX is saying just that. Until the price action calms down the VIX will remain aloft, but it is not at panic levels right now.
There are plenty of excuses to sell this market. Trade wars, tariffs, political drama, Libor is on the rise again, the FED is hiking rates... the list goes on and on. I still think there will be a lot fewer excuses to sell when this market finally does roll over. And I also think we will see this before it will be time to sell and get out of dodge.
The plan for this week starts with that $150 level for $IWM. If that level holds I think we may have seen a tradeable bottom. If not a test and hold of $SPY support, followed by a positive momentum turn will likely be a great spot to trade for more record highs this year, meaning that 1929 or 1987 style crash those uber bears are comparing this market to yet again, will have to wait another year.