NFTRH; Updating the ‘M’ Scenario

Below is this morning’s pre-market headline from Bloomberg. The fear stuff like a Trade War and missiles is sentiment stuff, and it usually serves to clean out over bullish sentiment. We have been managing a bounce in the stock market based on sentiment that became over bearish while at the same time major indexes tested – mostly successfully so far – their 200 day moving averages and held above the February highs.

The other part of the play was that it is earnings season and that may give the market a few weeks of bounce potential, maybe strong enough to test the highs (and fill some upside gaps). That was the ‘M’ double top scenario that could over a multi-week span calm over bearish sentiment and set the market up for a ‘next shoe’ to drop.

And that is exactly what the media are feeding investors this morning as fear fades and if pre-market’s positive prices translate the S&P 500 would open 5 points above yesterday’s high. That would still qualify as an in-process test of the daily chart’s SMA 50 but again, sentiment became constructive (quite over bearish) and it is earnings season. You know how the bulls are when they get the ball, especially after a significant fear fest. I myself am trying to keep in mind how intensely formerly frightened and newly emboldened bulls can push things.


So I just wanted to remind of the potential ‘M’ scenario and how its extended formation could bring with it angst for market bears in the near-term. If the 50 day averages get taken out I will likely lean into the bounce (either by reducing shorts or increasing longs) because I’d expect it to be a multi-week, possibly even multi-month affair.

We noted in NFTRH 495 that the VIX was in trouble and could be headed for the 12s. That is still the case at yesterday’s close and VIX is down about another 2.3% in pre-market. I am not predicting anything in whipsaw markets like this, but we should be aware that there is a fair amount of area between the current level and that which would indicate that complacency and investor comfort have returned, which we’d speculated could come with the market testing the highs. FYI.


Here is the ‘M’ top (weekly) chart along with the vulnerable looking VIX. The market has not established a new uptrend, but would start doing so with a rise above the daily SMA 50s that persists for a couple of days.

I believe this is all within the context of a topping process, but let’s remember how the market moves. It moves in time frames not well suited to our quicker thinking, calculating and rationalizing brains.

At this point technically, the market is still in correction mode, logically bouncing to test the SMA 50s. It can fail here and resume the correction. But taking out the SMA 50s brings the ‘M’ into play and while that could turn into a major top, its formation could make things look good and bullish for a while, considering potential earnings season and post-geopolitical relief stories that could run simultaneously.