Faltering Friday – Rally Retraces from the Top


It's not much in the grand scheme of things.

As we noted and predicted on Tuesday, the Russell Index is undergoing a long-overdue correction to the 1,640 line from 1,705 and, as noted on Tuesday – it's not really bearish unless we fail to hold 1,640.  So far, the other indexes have not really followed suit – yesterday's 200-point drop in the Dow was nothing – not even 1% of it's 26,825 start to the day.  BUT (and it's a big but), if the Russell does fall into a proper correction and fails to hold the 1,640 line – then we can look for all the indexes to begin correction and THEN things can get very interesting.

We calculated the retrace zones for the other indexes in yesterday's Live Member Chat Room and they are:

> Still looking for 1,678 (weak bounce) on/RTYgoing back to Tuesday's notes and below 1,670 is more likely that we're legging down to 1,640 (strong retrace from 1,700) and then we can expect the other indexes to AT LEAST weak retrace from their highs.

> That's off the year runs so, for the Dow, we're looking at 25,000 to 27,000 which is 2,000 points so 400-point retraces are 26,600 (weak) and 26,200 (strong):

> /ESis essentially the same /10 so 2,700 to 2,900 means 2,860 and 2,820 and, since/ESis still at 2,923, it makes a great short below the 2,920 line with tight stops above.

> /NQ6,400 to 7,600 is 1,200 so 240-point retraces and Nas loves 25s so call it 250 to 7,350 and 7,100.

We hit 26,600 on/YMyesterday and our/ESshorts paid $1,650 per contract at 2,890 but that's still not a proper correction on the S&P and we can re-short it on a move back below 2,900 with very tight stops over that line (2,904 now).  The Nasdaq fell to 7,450 and still above it's 7,350 weak retrace so, on the whole, the indexes are still very strong and will remain so if the Russell holds up its end, which it's likely to do today since it's Friday and thin trading is unlikely to break key technicals.

Next week, however, may be a different story so, if you haven't done so already (we have), it may be a good time to check your hedges and make sure you are ready for a 10-20% market correction (long overdue).  We may or may not have a new Supreme Court Judge over the weekend and, either way, the political turmoil will increase and the Chinese Chip Scandal will not disappear overnight, nor will the Trade War or the Italian Debt Crisis and Brexit is also coming to a head – all with just one month until the November elections.  

"May you live in interesting times" is a Chinese curse and these are certainly going to be interesting times!

September payrolls were a huge miss at just 134,000 jobs created but last month was revised higher, from 201,000 to 270,000 so really, what's the point?  Bonds are still in free-fall with rates rising all over the World and all this stress and strain on the global economy is bound to have repercussions which are not likely to neatly reverse a day or two later – like most of our crises seem to do when they are quickly swept under the rug.

Now we have a rug with a huge lump of things we've been ignoring underneath it and we're running out of places to hide the mess.  Kavanaugh has been a welcome distraction for President Trump as people have hardly had time to focus on the fraud and tax evasion charges but we always have Iran to start a war with if people find they have enough free time to think about those scandals.

Interesting times indeed!