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Week of Feb 4

New All Time Highs!

Welcome to February!

February typically is a down month for stocks, but equities are in a rates fueled jam job higher. The market is currently being propelled higher by 6 stocks (TSLA has dropped off) - and we are seeing extreme concentration and narrowing of the market.

Small caps of the Russell 2000 are still 25% off their ATH, while the equal weight SPX hasn't taken out its ATH either.

We live in a land of wild price movements - as Facebook gapped up 20% after earnings.

And BofA's Mike Wilson - aka "Wall Streets Biggest Bear" - has been removed from his advising position as the market continues to run him over.

So between narrow market breadth, and the bears all capitulating/being fired - is the top in or near?

Possibly - we need to see confirmation. But for now, everything is just a buy setup and I don't like to buy at ATH. This has forced me to leave indexes alone for the most part,

Now that the NFP and FOMC are behind us, I'm expecting the balance of February to be some great trading weather, especially in oil.

DXY:  DXY Finally broke out of its 2 week trading range - and is heading for the external liquidity levels we keep talking about. This will continue to put pressure on commodities

Energies: Oil gapped up on Sunday night, and continued to sell off all week long. I ALMOST got my 79.6 level, but they left it behind as the week has now formed a bearish engulfing candle.

Monthly - We came out of the IRL and now look to a ERL as our next target which looks to be the May lows, with December lows being along the way.

Weekly - we bearish engulfing candle on the week - so that is added confidence for the coming short in oil.

Daily - With the Context of the Monthly searching for lower prices down another 6-12%, we need to see a backtest and confirmation of the move lower on the daily chart. This week, we created a daily FVG that we need to backtest and confirm right around the 75 area - if this holds on the 1hour charts, I will be entering a short on oil.

Interest Rates:  This past week was FOMC, and Powell left rates UNCH. The Fed itself actually has 0 control over the bond market. What they CAN do, is set the Fed Funds Rate.

But the Fed Funds rate is just a laggard to the 2yr Bond. All the fed does with the FFR - is chase the 2yr note - and that is why Powell wants to start cutting rates.

Below you can see the orange line is the FFR, and the 2yr note is in candles. As you can see, there is currently around a 1% spread and the FFR needs to drop to catch up to the 2yr note to prevent arbitrage.

Companies everywhere are laying off people left and right - this isn't a sign of a bull market IMO.

With rates dropping, tech stocks are RIPPING higher, as they don't ask WHY rates are dropping. A drop in rates is always Bullish at first.

The Bond market is pricing in deflation - and those come in the form of recessions.

VIX:  VIX was flat on the week - but we are still setting up for a big VIX spike if we get the index rejection we are looking for.

My Take- This will most likely prove to be the final Policy Error from the Fed. As you can see above, the Fed is late to hike (remember "Transitory"?) and late to cut 100% of the time. The bond market is in the drivers seat, and Powell keeping Fed Funds up here, will CRUSH the banking system. This could be the final blow as regional banks are down 7% this week alone as they are saddled with bid-less Commercial Real Estate holdings, and Bond holdings that have been obliterated.

My take on this, It will all lead to a Powell driven Global Recession in size that we have never seen before.

I could make an argument for the indexes to double from here, or drop 90% - so I am on the sidelines of the indexes until they SHOW ME a structure that I can engage on for a weekly swing position. There is never a reason to FORCE a trade - especially when you can look elsewhere at things like Oil for beautiful and clean setups.

So here is the setup for this week;

  • I am flat indexes until they can SHOW ME a tradeable structure on the HTF.

  • Looking for Oil to backtest/confirm the drop up to around 74.5 area - then expecting a $4 drop initially.

Until next week - We'll be watching.

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