How Market Structure Predicted the Equity Sell Off
I posted an interview in my last blog post with John Taylor. In that interview on Hedge eye, Mr. Taylor talks about how market structure was telling us something. How market structure predicted the news to come. He speaks about the equity markets in 2001, where the markets looked ready for a sell off and then 9/11 happened, something he calls an outside influence. Many believe that news is what moves the markets. The truth is that it is the algo’s and the day traders who trade the news. The markets generally have things priced in. Call it imperfect information if you would like, but the market has this uncanny ability to move, and then see some fundamental news come out afterwards explaining the move and/or breakdown. It also confirmed this huge move in Oil, again chart in my previous blog post.
Now I am not saying I could predict the virus affects, but if you follow my work, I have been saying how an event would have to come for governments and central banks to save face. Some way for them to cut back to 0 interest rates (even negative), go back on QE, and do it in a way they can blame this outside influence rather than their own incompetence or failing monetary policy. This comes more from an economic background and structure which provides the framework for me to approach the world and markets…mostly from the classical school of economics.
My trading strategy is based on market structure, with markets only moving in 3 different ways. My job is to break those ways down and profit off of it.
The S&P short was a trade I took on the 4 hour on the break indicated by the arrow above. The market was in an uptrend with higher lows and higher highs, and then we began to range and create a certain topping pattern. The key here is that we were not making any new higher highs. The 3360 zone was the previous higher low swing we were working with, which also happened to be a flip zone. With that break, and according to market structure, once we nullify a previous swing (in the case the higher low), that trend is over. From here we expected a down trend with multiple waves as per market structure.
We can even take this out on the daily chart, where we are seeing our first confirmed lower high swing when writing:
Once again, the 3240 zone was the previous higher low swing we were working with, and after the break, we are officially in a downtrend and should expect multiple waves on the way down. Now we have our first lower high swing here after today’s break and close. Where do markets go from here? We can still make a move lower. Does the market really care about interest rate cuts? Yes it does make stocks the only place to go for real yield, but the coronavirus will still slow down the “real economy”. It seems that going long bonds is the best trade right now, and until we see bonds drop, indicating money leaving bonds for stocks (risk off back to risk on), these markets will have a hard time holding onto gains.
If you are a large fund, would you buy stocks now, not knowing the full repercussions of the coronavirus, or would you buy bonds, betting on the Fed having to cut rates to 0 to combat the recessionary effects of the virus AND holding a safe asset while doing it? This is what I have been saying. Bonds are now traded for capital appreciation (if central banks cut rates, the bonds I am holding with current rates will be worth more than the bonds issued after the rate cut with those rates), rather than yield. Stocks paying dividends are the new yield play.
To end off, let me show you the charts of other equity markets that HAVE already confirmed the lower high swing (indicated by the arrow) and look at the follow through move:
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How Market Structure Predicted the Equity Sell Off To learn more about profiting from market structure, visit our Courses page. To follow our trading setups