Post Waterfall Templates

"History doesn't repeat, but it does rhyme."

Wow, that was a nasty week for the SPX.  Weekly close at 3338 on Friday, Feb. 21, to 2954 on Friday, Feb. 28.  If you look at the chart below, you will  see that a monster bubble popped, because we're back to more stable, but still very high levels for the SPX.  Over the last 4 years, as shown below, you've gone from SPX 2000 to SPX 3390.  That is on top of a move from SPX 1250 to SPX 2000 the previous 4 years preceding 2016.  I would call it the central bank money printing bubble, because bond yields have been going lower and lower the whole time, to an all time low 10 year yield of 1.12% hit on Friday, Feb. 28.

February 2016 - February 2020

We finally hit a level on Friday where there was buying support, as well as Fed support, with Powell issuing an unanticipated Fed statement that he is watching markets and willing to provide appropriate policy (i.e., jawboning rate cuts coming) response to the coronavirus.

We are close to Fed panic levels, which always provides a market backstop and rally on their first move.  For long time SPX futures traders, they will remember the Bernanke Fed emergency discount window rate cut on Friday August 17, 2007 after the panicky drop down to the SPX 1370 on August 16, 2007 (see chart below).  For even longer time SPX futures traders, they will remember January 3, 2001, when Greenspan cut interest rates 50 bps intermeeting and that proved to be the intermediate bottom of the down move and provided a 3 week face ripper rally. 

February 2019 - February 2020

August 2017 - August 2018

 Top:  01/26/2018 = 2872.  Bottom:  02/09/2018 = 2532.  Bounce Retracement Top:  03/13/2018 = 2801.  79% retracement.  Retest of bottom:  04/02/2018 = 2553.  52 days from first bottom. 

March 2015 - March 2016

Top:  07/20/2015 = 2132.  Bottom:  08/24/2015 = 1867.  Bounce Retracement Top:  09/17/2015 = 2020.  58% retracement.  Retest of bottom:  09/29/2015 = 1871.  36 days from first bottom. 

February 2011 - February 2012

Top:  05/02/2011 = 1370.  Bottom:  08/09/2011 = 1101.  Bounce Retracement Top:  08/31/2011 = 1230.  48% retracement.  Retest of bottom:  10/04/2011

 = 1074.  55 days from first bottom. 

November 2009 - November 2010

Top: 04/26/2010 = 1219.  Bottom: 05/25/2010 = 1040.  Bounce Retracement Top:  6/21/2010 = 1131.  51% retracement.  Retest of bottom:  07/11/2010 = 1011.  47 days from first bottom. 

July 2007 - July 2008

Top:  07/19/2007 = 1555.  Bottom: 08/16/2007 = 1370 .  Bounce Retracement Top: 10/11/2007  = 1576.  111% retracement.  Retest of bottom:  NONE.

Local Top:  12/11/2007 = 1511.  Bottom: 01/23/2008 = 1270.  Bounce Retracement Top: 02/01/2008 = 1396.  52% retracement.  Retest of bottom: 03/17/2018 = 1256 .   53 days from first bottom. 

October 1999 - October 2000

Top: 03/10/2000 = 5132 .  Bottom: 04/17/2000 = 3227.  Bounce Retracement Top: 05/01/2000 = 3982 .  40% retracement.  Retest of bottom: 05/24/2000 = 3042 .  37 days from first bottom. 

November 1986 - March 1988

 Top:  08/25/1987 = 337 .  Bottom: 10/20/1987 = 216.  Bounce Retracement Top: 10/21/1987 = 259.  36% retracement.  Retest of bottom: 12/04/1987 = 221 .  45 days from first bottom.  

 After reviewing past waterfall declines in the SPX/NASDAQ since 1987, all 9 cases above, with the exception of August 2007 (not a pure waterfall, but more like a stair step waterfall as it took 3 weeks from top to bottom), after the initial few weeks of choppily bouncing higher, they retested the lows.  And the retests were usually successful, as they either held previous lows, or made just small undercuts of the previous lows and bounced strongly from there.  Most of the retests occurred about 5-7 weeks after the initial low. 

If Friday was the low of this waterfall decline, which is likely but not totally certain, then that gives you a probabilistic road map on how things will play out over the next 3 months.  You should expect choppy trading, with a 40-60% retracement higher of the waterfall decline, before a retest happens, usually 5-8 weeks later.  Assuming SPX hitting a low of 2855 on Friday marking the bottom, then a 40-60% retracement of that low gives a probable top between SPX 3069-3176.  That is a wide range so its probably safer to wait at least 3 weeks to short the SPX, which is around the next FOMC meeting and March futures/options expiration.  That is probably the perfect time for a top to form, as after triple witching expiration is usually a bearish seasonal period.  Then the market should retest the lows sometime in the middle of April.  

There will be lots of trading opportunities over the next 3 months.  Having a guideline for what to expect (lots of choppy action, trending higher into March futures options expiration, and then post FOMC/triple witching hangover and downtrend.   The specter of more bad coronavirus news is what will keep the bounce limited, in my view, and thus out of the 9 cases examined above, I would lean towards a more bearish outcome and weaker bounce than the average post waterfall trade.