The first few days of November have been a misdirection event unlike any in recent memory. The stampede of those individuals and institutions who feel underexposed to equities, while nervous bears cover their short positions for fear of new highs leading to a parabolic upside scenario, has caused one the craziest bars you will ever see on a weekly chart.
As a very simple rule for understanding price, range expansions are reversal patterns while range contractions are continuation patterns. While there are no rules on Wall Street that are static, understanding the role of expansionary volatility and contractionary volatility at important market turning points is essential.
What this week's move equates to is a 500 pound man doing back flips on the edge of a cliff during an ice storm. It's not a question of if he will fall, it's only a matter of when.
Given that I have been bearish a majority of the time since the September highs, those highs must be viewed as a major inflection point. The fact that the market has wasted this much energy just to get close to those highs is a significant energy burn that leaves little in the way of new energy to take the market to new highs and beyond.
This becomes especially true when you consider all of the event risk that lies ahead. From the elections likely eventually ending up with the Supreme Court, to fiscal policy being in limbo until next year, to an economy that is in desperate need of a functioning government, to the virus spiking, social unrest and so on.
The event risk moving into the end of 2020 while the market is doing back flips on a cliff's edge is a potentially lethal combination. The slippage from here will likely be epic in scope when it arrives....and that should be soon.
Extreme caution is not only warranted but fully encouraged.
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