Make Or Break – Big Trends Ahead

My research team recently highlighted the current market trend setup as as cautiously bullish while watching for a potential Bull-Trap setup. We have been warning of the risks associated with a Presidential election year event, as well as the continued disconnect between the market rally and the real-world economy. These next few days and weeks will make or break the markets.

FASTEN YOUR SEATBELTS – WE’RE ABOUT TO GO FOR A RIDE

Although our longer-term proprietary price modeling systems have switched into Bullish Trending mode, we are still very cautious of a Bull Trap pattern in the markets. This happens when price attempts to rally beyond recent high price levels (previous peaks) and stalls. It becomes a Bull Trap when price accelerates beyond the previous highs on moderate volume – pulling in unsuspecting traders who think this new price high is a breakout upside trend. 

In many cases, when price rotation ranges are rather muted and volatility is lower, a breakout of a previous high is technically a bullish trending signal. When price range rotation is extreme and volatility is high, it can become a trend trap for unsuspecting traders. When we add the typical election year price consolidation factors, we start to get a setup that more closely resembles a Bull-Trap than a breakout trend.

We believe the next five to ten trading days will be a make or break event for the markets. Very clear support has set up in the FAANGS Index and our Custom US Stock Market Index has set up a very clear technical divergence pattern after reaching a new price high.

Either support will hold near current price levels and the US stock market will continue to rally higher, or a big breakdown in price will set up, which may prompt an 11% to 16% downside price correction. This is why my research team has continued to push the “cautiously bullish” term and highlighted the potential for the Bull-Trap pattern.

Our research from June 1 also highlights how Election Year Cycles affect the markets:

“Currently, we are urging to stay overly cautious of this upward price trend in the US stock markets. Even though we have seen the NQ and other sectors rally to near all-time highs, we believe the markets are still excessively volatile and the indecision leading up to a Presidential election cycle could prompt some really big price moves in the future.

"We are still trading the long side of the market and advising our clients to take very low-risk trades which have been properly sized. This is a traders' market where technical traders can find incredible gains.

"June through August will likely become critical in regards to the future price trends and will likely determine if the markets continue to push higher or rotate downward as concerns and potential crisis events continue to unfold. Historically, June through August prior to a Presidential election cycle are very important measures of what happens near and after the election event.”

Technical traders should be concerned with risks at all times.The VIX has recently been trading near 27. Historically, VIX levels below 15 have been considered “moderate/low volatility levels." The current VIX level suggests volatility levels are, at a minimum, 2x historically moderate levels.

The downward price rotation in the Technology and NASDAQ sectors over the past ten or so days sets up a nearly perfect Bull-Trap pattern. The technical divergence between price highs and the RSI adds another layer of technical confirmation to the Bull-Trap setup. This leaves us with a make or break scenario where current support must hold in order for any further upside price activity to continue – otherwise, we are looking at a technical breakdown in price.

Our Custom FAANGS Index chart below highlights a similar RSI technical divergence pattern, and it clearly shows the support level (the green line) we believe is the active floor in price levels. If the FAANGS Index finds support above 900 and executes a “washout low” price rotation above the 900 level, we may see another upward price leg take place in the near future.

Otherwise, if the FAANGS Index breaks downward and breaches the 900 level, we believe the 750 level, the peak before the COVID-19 collapse, becomes a very real target.

Headed into the last 50+ days before the US presidential election event, uncertainty and concern related to future policy, tax rates, social unrest, and other issues permeate investors subconscious. We may not believe it to be true, but many technical traders are already thinking about and considering “what’s next” in relation to the next five or so months.

Remember, the election takes place on November 3, but the transitional process is typically not completed until after January 21 or so. Therefore, we are looking forward to at least five or more months of potentially extreme volatility and potentially large price rotations. 

In closing, we urge all technical traders to sit back, take a real hard look at these setups, and prepare for what may become a very active few weeks and months of trading and price volatility. One way or another, the US stock markets will either resume the upward price trend, or break lower because of this technical Bull-Trap pattern. The opportunities lie in properly positioning, hedging, and allocating capital effectively.