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Double Top?

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Sven Henrich via Northman Trader

Before you go all “here he goes again” I’m not calling for a double top, I’m highlighting the risk that markets may have made a double top and that has implications.

Let’s explore the evidence, then let’s discuss the risk.

Firstly, a set of plain facts: $SPX made a marginal new all time high in July. 3028 was the peak print. The Fed cut rates in July and markets sold off. Blame trade tensions all you want, but then markets rallied on trade optimism into September, the Fed cut rates again and $SPX peaked at 3022, a slightly lower high, and now has sold off again:

Those are the facts ma’am.

Now is this a confirmed double top? Not necessarily. Get a trade deal and off to the races we go right? What if there’s no trade deal and all you got are regressive earnings? What if the employment cycle is turning? What if the yield curve actually means something? What if decades long trends actually mean something? I’m asking for a friend.

See here’s the thing: Double tops are very rare and when they occur at the end of a business cycle one better pay attention.

But the Fed has our backs, nothing bad happens when the Fed cuts rates right? There won’t be double tops with the Fed cutting rates. Surely.

But we hit 3000+ in July and rejected. We hit 3,000+ in September and rejected. Both rejections have come on Fed rate cuts. What happens when the Fed cuts rates in stocks sell off anyways?

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Well, we already know the answer to that question, here’s the $SPX during 2007:

Looks awfully similar to the current $SPX chart doesn’t it?

Funny enough a record high in July followed by a marginal new high in October after the Fed cut rates. That was it. Lights out. Rate cuts did not bring about growth or a rising stock market. The initial instinct was the buy the rate cut, but then it didn’t matter and stocks were sold anyways. For now we see the same thing here and rate cuts are being sold.

But Wall Street is all bullish and says the Fed has our back you say. Yes that was the attitude back then too.

After all in December 2007, with the double top already in place Wall Street projected nothing but new highs for 2008, ignoring the prospect of a double top in place:

A double top was in place and everybody ignored it.

Are they ignoring it again?

Here are famous double tops in recent years:

All have one common characteristic: Negative divergences on new highs or close to new high. In 2000 and 2007 these double tops had especial meaning because they came at the end of a business cycle with unemployment having based at the lows and the yield curve inverted and yields declining.

Sound familiar?

Again, I’m not calling for a double top, I’m highlighting there is risk of one and the only way to invalidate this risk is to make new highs. No new highs and it looks the technical consequences could be dire.

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Remember: Tick tock

I posted this chart as a warning on September 19 with $SPX at 3006. Yesterday $SPX closed at 2887 confirming the risk of these 3,000 prices a few week ago.

And all this price action is occurring in context of the larger pattern structures we’ve been discussing:

I don’t know why this all being ignored again, but there it is. Megaphone, broken 2019 uptrend and now a potential double top with sell-offs following two rate cuts with a lot of open space below. But ok.

Double tops are only obvious in hindsight and this one remains unconfirmed, but it is a risk for bulls and they need to invalidate it soon. A trade deal may do it and perhaps must do the job as for now the Fed intervening is not showing signs of being able to produce sustained new highs. And yes there will be rallies, but if they fail to produce new highs watch out below.

As I outlined yesterday next week’s trade meeting is shaping up to be critical.


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