October 17, 2023 Missal: Decoupling
Something rotten.
Image 1. Hamlet. (The Globe Theatre, London)
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A follower today asked about the decoupling of the US bond market and equities, a development questioned by many market participants. In very recent days that may very well be due to the risk-on trade returning after an initial shock of developments in the Levant last week. Bonds are less bid, hence the rise in rates, while some of the flows have diverted to a bid in equities. However more concerning however is the long term relationship of bonds to equities seemingly decoupling this year - just as the market began to take off in Q2 nonetheless.
Image 2. NQ and UST prices, correlation broken (credit Crescat Capital)
Is someone wrong here (which is the first to correct)? Or is this the new normal heading into 2024? There are multiple variables at play, some of which undoubtedly less evident. True, US tech has been very well bid, taking the market with it, especially as Big Tech is seen as a ‘safe haven’ which I certainly did not predict. Do you think the high valuations in tech are justified? Optimism has not yet waned in face of depleted savings in the US, deteriorating macro environment, persistently high oil prices, and potentially a rocky earnings season.
Finally, demand for US government debt from entities like Saudi Arabia and China is a casualty within the scope of recent geopolitical developments including far less faith in the US government (USG) as a trusted partner (ran out of sanctions? just sanction the trading partners too). And while the USG issues debt at a record pace, we head into what’s a potentially very broad war in the Middle east and likely a very contested election domestically. As the establishment embraces legal recourse as a weapon against the opposition. Not the most reassuring sights!
Something is rotten in the state of Denmark?
Day Review
The overnight (ETH) session traded mostly within Friday’s lower distribution. A dip at European open found willing buyers at Friday’s close, and a strong bid saw RTH open within Friday’s LVN (singles). A very shallow dip below open confirmed buyer interest, and a break of the ONH was achieved in the opening range (OR - 30m for this purpose). A retest of the open in B period saw strong buying come in, which accelerated prices higher on short covering into our two main price targets above - 4396 and 4408 - ending daily OTFD.
This in itself was a major achievement for buyers given uncertainty in the geopolitical context, strong seller presence Friday, and a tepid performance by some of the megas like APPL and NVDA. Gold remained bid, signaling that the uncertainty is not short-lived. Buyers also managed to bring short- and medium-term value back over 4400 (4402). However.
The market found resistance before attempting the poor high 4419 - this is the same time I sent a tweet sharing my thoughts that we weren’t ready to test the high just yet. That marked the subsequent HOD. The remainder of the day was characterized by two-way trade around 4407, with a mid-afternoon dip in H period below IB mid which was bought up. That sell was noteworthy, with 4k contracts hitting the bid in a very short time.
The day closed right at five-day value 4402, forming a ‘p-shape’ indicative of absorption. If Friday was a ‘look below and fail’ of a three day balance, a rejection often has price traverse through balance and in the opposite direction. Yet we enter the fifth day of balance - compressing ahead of the next move.
Image 3. Quite the sell. Note a deep hammer (3m) into prior buyside, and subsequent rebid
Tuesday Missal and Levels
Consider 4396 the day’s pivot - both a prior level as well as the break in H period. Sellers want to establish time below this level for a break of 4376 while buyers look to clean up the poor high above.
The VIX can support buying below 16.75 and selling over 18.84 - a break of the latter could see another attempt to close above 20 this week. Again watch AAPL above 179 for support of the indices, as well as TSLA over 255; BTC over 28.9k can signal risk-on.
Buyer scenario. Open or IB close above 4408 will likely support a test of the poor high at 4419. That can clear the path to 4446, with 4435 as an area where sellers may emerge. In case of short covering and new volume, 4464 to 4476 are further targets.
Seller scenario. Sellers below pivot will look to trap buyers above 4384 - an hourly close below target LVN 4376. A break of this on momentum can see the 4350-7 area, where longer-term buyers may step in. Further below is the NPOC 4337.
Notes. Retail sale at 8h30EST may move the needle pre-market.
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