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Scott Phillips: burned out

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I’m starting to get burned out from a bruising few months… so I’m taking my wife to Canggu in Bali for a week. (pronounced Chang-gu)

It’s a little hipster village set in the rice paddies on a famous surf beach away from the crowds.

I’ve rented a cafe racer to get around, and I have a list of my favourite restaurants to revisit.

My intention is to get fat as a Christmas ham in just one week of fantastic food and epic sunsets.

Before I go I’d like to explain in detail the POTENTIALLY changing situation in the stock market right now.

Firstly the obvious.

What is an uptrend? A series of higher highs and higher lows.

We broke that pattern on Friday in the S&P futures but not in the cash index.

Intermarket divergences today in the stock indexes

 

Intermarket divergences today in the stock indexes

 

Couple of points.

If the real market (the cash index) goes down today and breaks that old spike low (on the second chart)… then the odds change.

We are no longer in an uptrend at that point. If we aren’t in an uptrend then we have a FALSE BREAK of the high, which is a low probability outcome. And we know (from the Price Action Masterclass) that low probability outcomes cause big moves.

That’s bearish as fuck if it happens.

BUT here is the kicker. The weirdness between cash and futures markets, and also the weirdness between the S&P and the Dow is all very consistent with a low forming before trend continuation.

Why? Because of a fascinating series of edges called intermarket correlations. These were first noticed by Dow Jones (actually a real person, yeah THAT Dow Jones)

The idea is that if the market is really going down, it should be going down everywhere. If the metals are going down BOTH gold and silver should be tanking. If the bonds are going down BOTH the 2 year and the 10 year notes should be hurting.

But we don’t have that here. Markets get wobbly around turning points. So logically this is behaving like a turning point rather than a straight shot to the downside.

It’s stinky, from a bearish perspective.

AND we have a very rare, but very strong edge. (File this one away for future use, seriously)

 

Intermarket divergences today in the stock indexes

 

So what’s the conclusion?

The bullish case exists in a weakened state. You actually have a good risk reward entry here, because we have a very sensible place to put a stop.

 

Intermarket divergences today in the stock indexes

 

So bottom line… still very cautiously bullish, until a break of Friday’s low. Then bearish.

Anyway, I’m out! Plane to catch

Scott

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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