The boiling point

Strength in the past week in the US stock indices may be a hint we are more advanced in the construction of the wave B rebound from the December lows. The rush to buy reflects the typical wave B psychology and can hardly be explained by the minimal uptick in “fundamentals” since the beginning of the year. In many ways, in fact, this rise is a younger (i.e. smaller degree) cousin of the 2003-2007 advance:

• it seems to have a lot to do with monetary conditions (cheap credit back then, pausing FED hikes now);
• it is accompanied by weaker overall economic performance than the preceding advance;
• the Brexit situation is the accompanying trouble that can blow it up (as opposed to the subprime build up in 2005-2006); and
• technically, at the very least, it displays a disturbing urge to resume climbing after the tiniest and briefest of corrections which is anything BUT healthy.

So what’s next. Well, I stated last week the correction wouldn’t be over before we touch lower levels and I stand by my forecast. We’ve always had the 2820-2840 area as difficult to overcome; if we overshoot it, somehow, what may seem like a near-term misfire will be more than compensated during the eventual wave C down, believe me. Overall, I have one message to convey: no matter how tempting, no matter how juicy this may look at times you should not join it. From a risk-reward perspective your options are 1. be patient and attempt shorts at the right times in which case you will make money in the end; or 2. be impatient and allow yourself sucked in, make some money initially and then be washed out during the wave C down. I am not saying this is the only recipe, I am saying that based on the method I use is THE RECIPE. If you chose to disregard the wave position because you have some other method you have confidence in just make sure you identify the levels below which you MUST exit in the event of a market stall because one is highly probable.

Now let’s talk a bit about Brexit so you understand what is likely to happen –Brexit being the only item I literally “bitched” about on the my twitter account @Real_STrader since I established it, I care that much about the thing. The British parliament has rejected Theresa May’s deal twice. That thing is in fact not a deal, it sounds like a surrender document forced upon a nation that has been defeated in War. That thing achieves at best BRINO – Brexit In Name Only – and is a total stitch up engineered initially by a public servant, Olly Robbins, following total collusion with Brussels’ unelected bureaucrats. That thing is a disgrace because it forces the United Kingdom to either be subject of the EU trade rules and legal system or face the threat of losing its territorial integrity. This is why the Unionist parties in Northern Ireland vehemently opposed it. The whole Irish border backstop is in fact an excuse to trap the UK inside the idiotic single market and customs union which by extension means continuing the jurisdiction of the European Courts of Justice system over the UK. This is what 17.4 million Brittons – or about 52% of the voters – have spoken AGAINST on June 23^rd, 2016 in the biggest democratic exercise in the history of the UK which saw 74% of the eligible British voters turn out to vote for something that through a series of backdoor deals and stitch ups is being not only disregarded but rather reversed.

The House of Commons has also voted for a non-binding resolution to reject a no-deal Brexit. MPs from constituencies that in some cases voted up to 80% exit in 2016 have shamelessly stated that they will disregard the voters’ input and vote against Brexit without a deal – which even goes contrary to the legislation they voted for when they triggered Article 50 when they agreed that with or without the deal “Brexit means Brexit”. This right there is riot material for the British electorate whose tradition and culture towards democracy is only mirrored by that of the United States of America. Very few people realize that despite the absolutely miserable and dishonest attempts to block Brexit, the default option available according to currently prevailing British legislation is that the UK leaves the EU on March 29^th WITH OR WITHOUT A DEAL. Adding to this are two problems at the moment. The first is that the parliament already voted down the so-called deal and I have no idea why a third attempt would be successful. The second is, obtaining an Article 50 extension to delay leaving the EU requires unanimity from EU’s 27 heads of state and we have at least Italy and potentially Poland and Hungary at this point that may veto it simply as a gesture of support to their euro sceptic British colleagues. Besides, many eurocrats themselves are not big fans of granting an Article 50 extension to the UK because that would mean Britain will have to contest the European elections scheduled in May. With the public rage currently engulfing the UK due to the Brexit betrayal it is highly likely that the UK would send in mostly euro sceptic MEPs at a time other parts of Europe are likely to do the same.  To sum it all up, the UK leaving without a deal is far more probable an option than a lot of people realize at the moment.

The one market speaking the truth that way is Cable – the GBPUSD exchange rate. A bearishly skewed sideways pattern that started last August and that delivered a new print low in January is apparently being terminated by a bearish rising wedge. This pattern implies that upon completion GBPUSD will likely retreat back to the starting point of the wedge at 1.24. In that event, larger time frame charts in fact indicate an extension to 1.12-1.17 will take place. So as a side point this week, we think GBPUSD shorts may make sense around 1.33-1.35 for a 15-20 cents collapse this spring. This whole Brexit situation makes perfect sense given the patterns in European indices, USDollar Index, metals and interest rates. It is also fully compatible with the idea that the US Indices have more time to crunch and perhaps a few teeth to crack before they get ready for a real leg up.

To conclude here with the SP 500 wave count and levels. We are unsure at this point what the rebound from 2720 is but we know that a push above 2843-2857 opens the door to a rally above 2900 – perhaps as the final leg of the advance from the December lows is prematurely unfolding. Watch 2843-2857 as resistances and 2826 / 2809 as support over the next week as they will offer clues regarding near-term gyrations. For the record, I was short the other week @ 2796 and covered 2730, I am now awaiting to short again. I need a hint of a reversal, an initial small degree wave down and a brief retest of highs and I think that if we get these three things, we will be in no time back into the 2650-2680 zone we talked about last week. One thing for sure, around these levels or slightly higher we’re getting close to the wave C down boiling point and something will have to give. I recognize I could be wrong in the end but my own discipline and the prevailing risk-reward ratios simply prevent me from joining what ultimately look like the bull trap of 2019 ………

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

TOP STOCK PICKS

WDAY

DIRECTION	SELLZONE	BUYZONE	RISK/REWARD	VEHICLE
SHORT	188-190	175	-2/11	OPTIONS

A pretty clear bearish setup is ripe for the taking here in WDAY. Two fairly strong distribution candles should serve as solid resistance and we can play for a move back to $175 where the gap higher occurred. For option traders IV is near the low end of the spectrum so look to take advantage.

ESTC

DIRECTION	BUYZONE	SELLZONE	RISK/REWARD	VEHICLE
LONG	84-85	94-95	-1/10	OPTIONS

ESTC like many other internet and application software stocks has had a roaring start to 2019. Spending most of its time thus far discovering higher, ESTC has most recently broken out above its wedge lower and broken back above VPOC leading me to believe the bulls are one again looking to take this stock higher. As long as we remain over VPOC for this fairly recent IPO I like our chances of seeing all time highs in short time.

FTNT

DIRECTION	BUYZONE	SELLZONE	RISK/REWARD	VEHICLE
LONG	83-84	100-105	-1/16	OPTIONS

Since the start of 2016, FTNT has been in a pronouced bull market higher. It was nearly uninterruped in its quest higher until the sell off in late September last year when so many stocks were sold hard. Since then, FTNT has managed to carve out a decent looking cup and handle pattern which recently recapture the point of control. This gives us an easy level to play higher from. Ultimately I believe FTNT takes out highs put in last year.

ACAD

DIRECTION	SELLZONE	BUYZONE	RISK/REWARD	VEHICLE
SHORT	26-27	23-24	-1/4	OPTIONS

ACAD may be the most defined short setup in the market right now. As price currently sits up under VPOC taking into account 5 years of price history, we have a defined level from which to play. There is a lot of overhead supply after the long term triangle broke down which spanned nearly two years. As price returns back up to the underside of that, watch as bulls will likely not be strong enough to push price higher.

RPD

DIRECTION	BUYZONE	SELLZONE	RISK/REWARD	VEHICLE
LONG	48-49	60-61	-1/12	OPTIONS

A bull flag which I believe will resolve higher, RPD is the beneficiary of some bull flow which came in late Friday as OPEX came to a close. It is part of the application software and security group which has had a stellar 2019 thus far and this should continue in the near term.

[/vc_column_text][/vc_column][/vc_row]