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The Morning Line

When Bulls Turn Certain

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We went out on a limb here last week with speculation that, just maybe, the bull market was topping. Alas, Friday ended with a short-covering orgy that bloodied bears, leaving the boldest of them festooned on the ropes. My hunch had been rooted in technical factors, including an ominous head-and-shoulders pattern that has been evolving since January in IWM, a vehicle that tracks the small-cap Russell 2000. Unfortunately for bears, rather than dropping into a steep dive like the textbook says it should have, the index tacked on five new bars to the right shoulder, turning its promising symmetry into asymmetrical dross — a mocking, rubberized Mona Lisa smile. Similarly, the E-Mini S&Ps had seemed well poised for a long overdue plunge. They’d turned down sharply the week before after getting within an inch of a major ‘Hidden Pivot’ resistance that was capable in theory of stopping a buying stampede. By Friday’s close, however, El Toro had gored the resistance and was snorting flames. In both instances, the geniuses who purport to be “managing” your and Other People’s Money provided bullish spin and buoyancy. But when the rally threatened to turn ballistic on Thursday, bears scrambled to buy ’em back lest they get trampled this week by Wall Street’s recurrent homage to Pamplona.

Can you blame them for panicking? With the Fed monetizing full-tilt and Joe Biden hawking a version of the New Deal that makes FDR’s look miserly, who would be so foolhardy as to bet against the asset bubble? Add corporate share buybacks to the raucous mix of monetary and fiscal stimulus and it becomes difficult to imagine how the bull market could possibly end. Apple’s announced $50 billion buyback alone will help sustain the illusion of health in the U.S. pension system while eliciting more unearned huzzahs for Wall Street’s best and brightest even though they’ve been on autopilot since 2009.

Bitcoin’s Awesome Rumble

And yet, there was the sobering spectacle of bitcoin, the most wildly deranged vehicle of them all, acting like there might actually be a tomorrow. It has been flouncing ungainfully since early March, belching fire and making hellacious noises like a dragster waiting for the amber light to change. But amber has persisted for too long and undoubtedly is making the crypto crowd stir-crazy, since none of them doubts that $100,000 bitcoin is coming eventually. Seasoned commodity traders know better, however, and are doubtless preparing not for inflation to go vertical, as nearly everyone seems to expect, but to be asphyxiated by some turn of events too mundane to have been predicted. In the meantime, bullish sentiment appears but one strong rally removed from becoming bullish certitude. If the upsurge in shares comes amidst a summer of post-lockdown jubilation, that would be good reason to secure the hatches and reef the sails. Hurricane season has produced no disasters on Wall Street that crypto’s most avid traders would recall, and that is all the more reason to take seasonality quite seriously with the approach of autumn 2021.

Rick's Picks for Friday
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$GCM21 – June Gold (Last:1819.40)

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$SIN21 – July Silver (Last:27.15)

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$ESM21 – June E-Mini S&PS (Last:4111.25)

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$BRTI – CME Bitcoin Index (Last:50,753)

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$+IWM – Russell 2000 ETF (Last:212.45)

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The menacing head-and-shoulders pattern that promised a day or two of reckoning for giddy bulls has deteriorated with the extension of the right shoulder by an additional five daily bars. Since a failed head-and-shoulders top is implicitly bullish, I’ve redrawn the chart to show a gnarly pattern with a 237.72 rally target. It tripped a textbook-perfect mechanical buy signal at 215.45  on April 20, but I am not suggesting that the green line be re-used if IWM swoons again.  I would, however, be moderately enthused about a p2 (pink line) entry if it is hit on a pullback from a high 3-4 points shy of D. _______ UPDATE (May 10, 5:24 p.m. EST): I’d like to see IWM take out the 208.03 low of the bullish pattern projecting to 237.72 before I wax enthusiastic again about the head-and-shoulders pattern. Let’s cross our fingers and hope for the worst.  _______ UPDATE (May 13, 12:58 a.m.):  Some subscribers hold the July 16 175/180/185 put butterfly for 0.10 or less based on a recommendation I made on April 18. Better yet, one subscriber legged on the position for a net CREDIT of 0.01 using my explicitly detailed instructions here a while back. The spread is worth about 0.15 as a result of  this week’s plunge, but IWM will need to fall below 200 by early June before the spreads get perky enough to let us cash out of half for twice what we paid, as is our custom. Please let me know in the chat room if you hold the spread so that I can gauge subscriber enthusiasm for it. [Not high, evidently, since only three subscribers have reported positions. I will continue to offer tracking guidance nonetheless.]

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$+DIA – Dow Industrials ETF (Last:340.37)

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$QQQ – Nasdaq ETF (Last:316.89)

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The Cubes tripped a mechanical buy at the red line (326.27) last week, but I did not recommend the trade because it looked significantly riskier than bidding at the green line. The subsequent bounce from the higher level looks likely to reach the secondary Hidden Pivot at 340.66, but I’ll be curious to see whether buyers have enough energy left for a quick push to the 355.05 target broached here earlier. If so, they would signal it with a decisive move past p2=340.66, followed by a close above it on the same day. _____ UPDATE (May 10, 5:46 p.m. ET): Honest markets won a rare victory Monday with the drubbing the Cubes suffered. Now they are bound for a minimum 320.06, the ‘D’ target of this pattern. The A-B impulse leg is textbook-compliant, and that’s why the crushing of p=328.36 means that more downside at least to ‘D’ is a ‘definite’. We’ll be better able to judge whether bears have run out of guts when we’ve seen QQQ interact with this fine Hidden Pivot support. Scalpers who know what they’re doing and don’t flinch when they detect a falling piano coming their way can try bottom-fishing, but the rest of us will be better served by spectating. ______ UPDATE (May 11, 11:01 p.m.): Sellers exceeded my 320.06 target by a not insignificant 1.04 points, suggesting there is more weakness to come. _______ UPDATE (May 13, 12:49 a.m.): Yes, x=311.87 would trigger a ‘mechanical’ buy signal, but you’d need a stop-loss at 297.47, and a price objective of just 326.27, not D=355.05. This is not to say the bull market is necessarily over, only that 355.05 could be a long time in coming if it is reached at all. 

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