Yet another strong up week for US indices. VIX stuck around 12. DAX with a weekly doji. As said and written before, unlike US indices, DAX has a trendline resistance on daily charts, and it is still in the trading channel. Next week is full with potential catalysts, as we can see in the table below.
On Monday, there could be lower liquidity environment on European indices also, due to Martin Luther King Day in US.
Chart #1 - SPX Cash Index daily
SPX in the "Don't worry be happy" mode. Staggering number of unfilled cash index gaps stacking behind. As Peter Reznichek noted in his weekly video The Strongest House of Cards in the World, there are number of futures gaps and 14 VPOCs from October lows.
I am writing in Morning notes for some time that all of this is very similar to Jan 2018 - a very extended move, weak structure, that can mean a large liquidation break is coming. That will most likely be a buying opportunity on a first test, and can also be traded on a short side for experienced traders. Important thing about strong trends and markets that are in "uncharted territory", meaning no horizontal resistance above - is to not guess tops, but wat for PA confirmation. Long holders also must be aware of potential risk at these prices, and IMO - to push their protective stops higher.
Very good ES_F 180 min chart from Chris from Sweden, you can find clicking on the link.
Chris Twitter handle: @stoffengg
One of the old school ways how to determine how much is a market really stretched is to look at the blanko chart and price distance from classic moving averages, and those are DMA 200, 50 and 20. Example on next chart. (I am using simple MA 50 and 200)
Chart #2 - Apple Weekly
Now, if this is not stretched, then I don't know what is. But that by itself is not a call for short of this, or any other similar market. This is notable, and as written before, AAPL and MSFT (shown in last Weekly Analyses) are the most extended out of leading FAANGMAN stocks. Speaking about these stocks - real earnings excitement starts with them, and Netflix will report on Tuesday, after the close. NDX is current index leader in US, and it tends to go up into those earnings.
Chart #3 - RUT Daily
Russell 2000 is one of the indices that I often analyze. It is lagging behind big brothers SPX and NDX for months. Now it is very close to ATH level, and first test of it could provide a good selling opportunity. Reaction from ATH level - IF tested - can give us a good information. Like - shallow pullback and another attack higher would signal likely breakout, while deeper pullback could provide a buying opportunity, again - on the first test.
When we speak about lagging indices and intermarket divergences, I found this comparison between DAX, SPX and RUT 60 minutes charts useful. Click on that link, and you will find a tweet with those charts from Austrian trader and analyst that I like to follow.
You can find him on this Twitter handle: @XetraDax30
Chart #4 - DAX Cash Index Daily
While SPX has 17 cash index gaps since October 2019, DAX has only five. DAX also has on both Cash and Futures charts a channel trendline right around current prices, and ATH level very close. We also have two overlapping ranges. Let's observe that by zooming on a 30 min chart.
Chart #5 - DAX Cash Index 30 min
A chart like this one, was in Morning material of DAILY DOSE OF DAX Service each day last week. It serves to learn the importance of cash index levels - RTH values. We trade Futures or CFDs - but must know Cash levels as well. Difference between POKES and when market actually break a level and HOLD above it.
Conclusion: Still no sign of US markets getting tired, which only means NOT to guess the top. Like in Jan 2018 - charts will speak for themselves. SPX is still a BTFMD market, a ONE SIDED market, that is now very high to initiate a long position, and still risky to blindly short - without a confirmation. That makes these markets very difficult to initiate a swing position, so only scalping and day-trading for new positions.
Majority of DAX components will report FY 2019 earnings in February and March. As long DAX is holding above ~13,300 - that is IMO medium term neutral bullish. On Friday, we got a marginal 2020 higher high, and yet another false break, in a week of false breaks (this is for day traders). All of this consolidating is a preparation for attempt to make new all time high, and we must stay open for failure as well. That is why we need our bull/bear lines and awareness of short term players inventory, since they tend to be trapped over and over again. Being "long in the hole", or "short in the hole" - providing us with many false breaks setups.
Have an open mind about both markets. Nimble and flexible.
In short term trading it is very important to properly understand context heading into every day, to know from which side wind is blowing - who has the short term control, and which side will be forced to liquidate IF and WHEN market hold above or below a certain level. What is the level of volatility, what can we expect from any particular day, what market already done in premarket session, what possible setups can be available, and so on... the things that we constantly learn in the DAILY DOSE OF DAX.