The recurring themes of my recent posts have been bearish divergences and overdue time windows. It can be frustrating to some technicians who see indicators push the envelope beyond what reasonable people think should happen. The reality is the charts we follow are mere representations of human emotion. On the bullish side, emotions such as happiness, euphoria and greed can extend for a long period. On the other hand, bearish sentiments such as fear and panic cause markets to drop like a rock. This is why bear phases end quicker than their bullish counterparts do.
What we have had these past few weeks is an extended celebration, first of an all time high in the Dow and then cresting 12,000. In this column, we pay close attention to how sentiment affects the technical picture. This is precisely why we have respected the rally despite pushing the technical envelope. In my work, I know momentum indicators such as MACD can stay extreme for extended periods and will contribute to a reversal or pattern change only when we hit an important time bar.
In the past two weeks, there have been a couple of opportunities for a change of pattern. The markets elected to ignore the first one, but have finally respected the second. The S&P500 finally hit a high-water mark last week on the 89th trading bar off the June low. Other markets have respected this window as well as the NDX/NASDAQ started a consolidation. Big caps have led this post Labor Day rally sequence and tech stocks continues to lag. This week the SOX also put in a high in sympathy with the S&P500 and has not even reached the 61% retracement of the January high. The NDX/NASDAQ are still not confirming the Dow by not reaching their 2006 respective highs.
When time windows finally hit, it does not necessarily mean a reversal. Sometimes all we get is a sideways consolidation. This time we are consolidating at major resistance for the NDX/NASDAQ, which are right near their 2006 highs. This is also a week where we have the next to last FOMC meeting for the year. Traditionally, the trading leading up to these Fed windows is slow so I would look for a continuation of this sideways consolidation pattern we have had the past few days.
WHAT TO LOOK FOR
This is an important week with the NASDAQ to test the 2006 high (2375) first. I do not want to impose my will on the market but the technical picture with the information we have now suggests the NASDAQ does have a much better chance of taking out 2375 than the NDX does of taking out the January high of 1761. Here are the two scenarios I am watching:
1. Buy the rumor, sell the news. We could hit yet another high leading into Wednesday in the Dow with a possible high in the NASDAQ, as the NDX does not confirm. After the Fed meeting we start to sell off.
2. We continue in a listless sideways consolidation for the first half of the week and the markets accelerate higher after the Fed speaks.
We are at the great fork in the road. Let the markets decide what they want to do. Questions or feedback? Email Fibonacciman@aol.com
