The markets recently reminded me of a Sesame Street episode that my little boy loves to watch, involving Minnesota Mel, Texas Telly, and the Golden Triangle of Destiny! If you’ve missed that episode, here it is. It’s a good one.
A so-named “Golden Triangle of Destiny” is now developing in the S&P 500 (SPY) – i.e. a “symmetrical triangle pattern” forming in advance of the Federal Reserve meeting September 17. Chart readers will tell you that such a pattern signals a dampening of volatility as the market bounces between the upper (resistance) and lower (support) bounds as the day of the Fed meeting nears. We frankly can’t wait for the news. The suspense is near-unbearable, and the repercussions are far-reaching.
But not only is the decision of a rate hike far from set in stone at this point, the market’s reaction to whatever the Fed does is probably even more uncertain. Conventional technical speak will tell you that we’ll probably witness an explosive move upward or downward near the apex (point) on September 17, which happens to coincide with the Fed meeting. Most technicians will tell you that such an explosive move will be lower, however, breaking through the support line of the triangle pattern, resulting in a continuation of the downtrend beginning at the market highs set in May. Most symmetrical triangles are “continuation” patterns.
Whatever the knee-jerk reaction to the Fed decision, however, it’s probably likely that, in the event of a bounce, the market will reverse course in the days and weeks after. For example, should a breakthrough of the triangle resistance line ensue, overhead supply of eager sellers that missed an exit in advance of the late August crash will likely prevent the S&P 500 from reaching new highs this year, or in the near term. Such a dynamic would therefore create the upper bound of a newly-defined downtrend. If the market breaks sharply lower after the Fed announcement, the current resistance line of the ongoing triangle pattern would likely be extended.
Our crystal ball tells us that it’s most likely we’ll see a sharp bounce on the Fed announcement as markets breathe a sigh of relief, a move that in time will eventually come to define an upper bound of a new downtrend–making recent advances during the past several days mere “up days” in an ensuing bear market. If we see a sharp move lower on the Fed news, we could be in for some of the most aggressive selling we’ve witnessed in some time, perhaps revisiting the intra-day lows set on August 24. The charts aren’t “speaking” very encouragingly at this point.
We’ll see how wrong the prophecies of our crystal ball eventually turn out, but all of our experience says the odds are stacked against the continuation of this multi-year, Fed-induced equity bull market. Valuations are still stretched, technicals are broken across many broad-based charts, and sentiment is far from positive. Global economic uncertainty that has thrown Brazil and Canada (EWC) into recessions and slowed the pace of GDP expansion in Australia (EWA) and China has only begun to take its toll on connected nations. The US equity markets may still be a better place for bargain hunting, but that’s a relative term.
Indexers could be in for some of the toughest sledding yet. Beware the Golden Triangle of Destiny, the “rarest, most beautiful triangle in the whole world.” And you thought the unveiling of Apple’s (AAPL) new 12.9” iPad Pro was the biggest news of the day.