Thursday, 6 April 2017

Is the Trump Rally Over? Part 2

This is a follow-up of Part 1 of Is the Trump Rally Over?, especially expanding on the last 2 paragraphs of that article. I.e. speculating what's the most likely target if this pullback continues.

TNX, 10 Year Treasury Note yield chart
TNX, 10 Year Treasury Note yield chart
(click to enlarge)

Since the election on 7/11/2017, the Trump Rally euphoria propelled the TNX by a staggering 80 bps from 1.82% to 2.61% in less than 6 weeks ! An impressive run. Since mid Dec 2016, it has been range bound between 2.30% to 2.60%. The quick run-up was due to Trumpflation, or the anticipation of it. Now, the market is digesting the Trumpflation Trade.

Lately it has problem even trying to reach the upper bound, implying - actually influencing - the direction of the equity market. In fact, it has problem even challenging the 50d MA. If it continues to languish below the 50d MA, or worse, drops below the lower bound of 2.30%, the equity market will follow it southwards rapidly (gold should benefit from it). TNX might tempt to fill in some of the gaps in its gap-up run.

SPY ETF, S&P500 chart

The SPY has been in the downtrend since its top of 240 at the start of the month of March. Unless it breaks out of this downtrend, its path of least resistance is heading lower until proven otherwise.

One likely scenario is that SPY would pullback to ~225. This is a logical as well as a strong support because this is the confluence of 3 pivots,

1.   The lower bound of this rising channel (in light purple). This SPY lower bound is delineated by Feb 2016 low and election eve low.
2.  200d MA. Note how closely is the 200d MA hugging the lower channel bound since election day.
3.  23.6% Fib retracement level. This is the 1st Fib retracement level taken from the lowest price point in this rally (11 Feb 2016) to the highest price point of this rally (1 March 2017).

This drop from the top of 240 to 225 represents a ~6% pullback, which seems like a typical number from the past records.

Of course, it doesn't have to fall this low. I'm not saying it will play out this way. Nobody knows. Just saying this is a WORST case scenario as this support is quite strong because of its triple pivots. There're plenty of supports above 225. If - a big if - it drops below this, then the whole rally will change in character. If it rebounds from or before ~225 level, this rally continues with a healthy correction.

As a way of trapping the bears, it's entirely possible that it would drop below ~225 for a day or two to suck in short sellers, just for fun. In bull market, bear traps are everywhere. Watch out!

There're certainly plenty of news coming up to rattle the market: Trump-Xi meeting, Brexit, French election, nuclear rattling from the ruler of Kim dynasty of the Hermit Kingdom, etc. Not to mention Fed's Open Mouth operation from Minute to Minute. Earning report is coming up. It's better not disappoint.

Update 7 April
April is a strong month. With a reversal of falling crude, the above scenario would be more likely to play out in May when crude price peaks or at least has a good run up. As the adage says, "Sell in May and go away". If during this strong month, SPY can't make a break out of the existing downtrend with earning releases occurring, the chance of a accelerated downside is increased in May. If there's a correction, Nasdaq should be the sector to correct the most. You wouldn't want to chase techs if you're longer term investors. If you're short term traders, be nimble.

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