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It was a very slow day. The market just consolidated sideways, with no significant headlines driving the price.
The pattern in the S&P 500 since March 11 appears to be part of a bear flag, or ending diagonal triangle. A clear 5-wave overlapping structure is in place, which suggests it is corrective. If the count is correct, then today’s high marks the end of the pattern, and he next significant move in the index will be lower, which leads to an eventual break of the low around 5,500. If this is right, we should move quickly to fill yesterday’s gap and move back to 5,700, as the first step. I would think a move above 5,800 invalidates this idea.
In the meantime, it’s possible that with the quarter-end coming, I’m feeling a bit overconfident about this view because I know the reverse repo facility will ramp up, which will likely drain liquidity between now and the end of the month. It rose to about $215 billion today and could very well be at about $500 billion on March 31.
We will know if the liquidity is getting tight, if SOFR starts rising, and if it heads over 4.4%. The other day, it was trading below 4.3% with the overnight funding flush with cash, likely from investors moving out of equities into safer waters. Now, we are looking at the opposite scenario where banks pull liquidity from the market to shore up their balance sheets for quarter-end.
Also, today’s volume in the S&P 500 was just 1 million contracts, so I’m thinking that sellers have just taken a break.
Bitcoin could be the first sign if liquidity starts to go. With it at resistance and a very similar pattern to the S&P 500, it is worth keeping an eye on from that standpoint.
-Mike
Terms By ChatGPT:
1. Bear flag – A technical chart pattern indicating a pause during a downtrend, often followed by a continuation lower.
2.Ending diagonal triangle – A technical analysis pattern that occurs at the end of a strong trend, typically signaling a reversal.
3.Corrective (structure) – In Elliott Wave Theory, a price move that goes against the larger trend, usually more complex and overlapping than impulsive moves.
4.Reverse repo facility – A monetary policy tool where the Federal Reserve sells securities to banks with an agreement to repurchase them later, used to manage short-term liquidity.
5.SOFR (Secured Overnight Financing Rate) – A benchmark interest rate for dollar-denominated loans and derivatives, based on transactions in the Treasury repurchase market.
6.Gap – In trading, a break between prices on a chart where no trading occurred, often due to news or significant moves.
7.Liquidity – The availability of cash or easily tradable assets in the market.
8.Shore up (balance sheets) – Strengthen a company’s financial position, often by increasing cash reserves or reducing liabilities.
9.Resistance (Bitcoin context) – A price level at which an asset repeatedly struggles to move above, indicating selling pressure.
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