To The Moon

Our Nasdaq short position was filled near last week’s rebound high, shortly before the market fell sharply and formed a bearish engulfing pattern on the monthly chart. At this sensitive point in the fourth quarter, is the decline the beginning of a trend reversal or merely another interruption in the slow US equity bull market?

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The bottom line is that the market may rebound and consolidate over the next one to two weeks, but it faces a larger correction over the next one to two months. From a longer term perspective, there is still insufficient evidence that the nearly 20 year bull market has ended or that a new bear cycle has begun. After sufficient correction through time or price, the established upward trend is likely to reassert itself. The Nasdaq remains our main reference. Although the S&P 500 and Dow show slightly different patterns, the Nasdaq continues to provide the clearest signal in a technology led market.

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The clearest medium term bearish signal for US equities is the reversal engulfing pattern on the monthly chart. A similar structure appeared in July. Although the market reached a new high in October, the probability of a bull trap now appears high. Identical monthly patterns are uncommon, but the chart shows several comparable warning signals. Most were followed by corrections lasting one quarter or longer.

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On the shorter term daily chart, 27,200 continues to provide solid technical support. After three consecutive weekly declines, the index has also reached its initial downside target at 28,500. With the market now showing interim oversold conditions, a technical recovery is increasingly likely. The risk reward of maintaining an aggressively bearish view or adding new short positions is therefore limited.

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A key reason the long term trend remains difficult to assess is that Trump’s post midterm policy agenda has yet to fully emerge, leaving the final policy framework unclear. From the perspective of US economic interests, a major market correction may be acceptable, while allowing the broader trend to turn bearish would be far less desirable. Unless an uncontrollable variable emerges, the probability of a deep correction remains higher than that of a full transition from bull to bear market.

From a trading perspective, however, we began shifting our approach last week and now prefer selling into rebounds. In addition to the medium term bearish outlook, further weakness in other leading indicators points in the same direction. Gold broke below its $3,955 low, while cryptocurrencies accelerated lower in the short term following the BN theft incident. Although the US Dollar Index and Treasuries are also correcting, broad weakness across risk assets remains evident.

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The main risk events this week are the midterm election results and whether Trump announces any major policy initiatives. Across asset markets, investors should also watch for signs that long duration Treasury yields are stabilizing.

For specific trades, half of the Nasdaq short position was filled at 30,100 last week. This week, the remaining short limit order at 31,000 will be cancelled. The stop on the existing half position will be lowered to 29,500, while the target remains unchanged at 27,250. If the index rebounds, we will look for another opportunity to establish short exposure.

Euro futures made a marginal new low last week before rebounding quickly. A short term recovery remains possible, although its potential size is highly uncertain. The pending orders will therefore be adjusted to limit sells at 1.1290, 1.1430 and 1.1490, with one third of the position allocated to each level. The stop is set at 1.1580 and the target at 1.0900.

A new gold order will be placed this week. Sell at a limit price of $4,205, with a stop at $4,330 and a target at $3,830.

P.S. Once a trade reaches its first target, the stop will automatically move to the entry price. Any adjustments after execution will be provided in future updates.

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