It was not easy to present yet another update last week that anticipated additional highs in the face of an outside down week, which has a great record of being correct. In the Jan. 28 update, I wrote:
Could the reversal-looking pattern only be part of a larger correction that’s stalling for time? When I look over many of my charts, the answer that pops out is ‘yes.’ So, even though I can label that a top is in, I will not do it yet for several reasons. The sentiment on that drop was not what I wanted to see and, believe it or not, I have two valid setups for additional highs. Another huge leg up isn't in the cards, but I'm not about to be short prematurely into the squeeze of all squeezes and get taken out of the position minutes before it turns.
Once again, the market had most traders convinced last week the top was in only to leave them on the sidelines or even worse, short. It is amazing the market simply will not pull back and continues to grind upward, leaving no one a chance to get in cheap.
I am sure sentiment has played its part in recent weeks and is still fueling the markets’ move higher as the old tops appear on the radar screen. Last week started with some decent sentiment readings, but closed with everyone again throwing money into puts trying to be top pickers. Of course, sentiment can change in a day, but that is what the numbers read as of Friday’s close.
Still, an interesting development occurred as a different tune arose from the bearish camp late in the week. Every single bear I spoke with on Thursday and Friday now wanted to buy after having fought the relentless upward move every day, week and month since June. All of a sudden, the S&P has hundreds of points to rally, and quickly. That, my friend, is the smell of capitulation!
When the bears capitulate, it is usually the sign that we are topping. Short term, sure, you can still make some money on the long side. But for the most part, these were not short-term trades I was hearing about from the former bears. I think an exaggeratedly bullish view can be as bad as an unbearably-bearish view, so I’ll pass on the idea of a several-hundred point rally from here on, and work with something a little less biased. In fact, I think I will stick with last summer’s idea that I thought the ultimate target for the NYSE was a hidden Fibonacci magnet of 9314.
It was a great event this week when the NYSE hit the exact number I had called last summer. Mission accomplished! More than 60 of our full time trading members watched from the chatroom as the target got hit. Since then, I have also received e-mails from many weekly readers expressing their thankfulness because that target kept them from shorting this market week after week after week, and I hope many of you have had that same good luck. If you are not sure what type of disaster you might have removed from your life by staying long, look at a daily S&P chart. There are lots of margin calls and pain on them.
As you know, we nailed the 9314 target and then decided to “vibrate” around it instead of falling off or knifing through. In my understanding, the market recognized its destination and is now deciding where to go from here. If you are struggling to understand what the play is now, it is easier than you think if you just play the market’s hand. We are right on schedule so far and have reached many targets, but does that mean we have to stop here? I hope you all understand the answer is ‘no.’
While I am not calling the top yet, you should understand why I’m not buying the bullish, “to da moon” case. I had a plan and now I want to see it through. I started with SPX 1360 and adjusted the targets every week until I saw confirmation of a top or the NYSE reaches its target. Well, the NYSE did that this week and I am prepared to look for a turn. But no, we did NOT have confirmation that this week was it. No way. But I do have enough evidence that if things remain as they are, we will rollover soon.
The chart above shows the present disconnect between the SPX and NDX at the moment. Unless the Sox and NDX get into high gear immediately, the market might have a problem very soon. I also mentioned on the site last week that the Russell was not acting like a top was in yet. That idea was correct as it went on to make all-time new highs. At this point, it can be close to done and I expect it to showoff at a turn and lose up to 30 points in a day.
That said, you could make the case that if all is peaceful next week, we could doll up a few markets and give them their final changes. Below is one of the charts asking for a bit more work before leaving this area. The Wilshire 5000 is begging for those old highs.
We have noted before that some markets read like a print from an Elliott Wave textbook. Of course, you would not need TTC or an update like this if the markets were easy to game. There are some smaller markets that always execute perfect patterns and behave as they should. Look at the chart below. If the S&P traded like this it would just be too easy!
But, of course, the S&P does not trade like a textbook ,and that is exactly why you need the resources available at TTC and that voice expressing what the crowd will not. Just as it was dangerous to predict a huge rally last summer, its hard here to push for a bit of caution as the markets advance each and every day. Tops do not form like bottoms do. This is a market where the bulls have the upper hand and are squeezing! Seriously, I think this is make or break time for the market. I’ve mentioned a new target of SPX 1472, but there’s a great chance of turning before, and I think we should. But that does not mean that the basic concept of buyers overwhelming sellers here couldn’t create an explosive rally, nor will we think about being heroes if it does. I don’t see that yet, but I want everyone to understand, this is in the big boy’s territory now.
Just because the S&P doesn’t always make obvious, easy-to-predict moves doesn’t mean there aren’t domestic markets that sometimes do. The chart below of the transports is a good example of keeping it simple. It clearly hit that trendline to the tick last summer and took off. How so many traders were bearish against that is hard to understand, but they were. The point is: make money where the market makes it easy, don’t go chasing after a miracle.
I see next week as a slight advance on Monday and then possibly a boring consolidation before another advance that marks a turn. Don’t make that idea become your bias as in this type of market, anything can change immediately and I know we will be right on top of it real time, you should be also. Don’t lose sight that maybe all this market will do is poke its head to a new high. Maybe it’s done; maybe it needs a bit more. We monitor this as we go forward.
Oil
When oil was at $75, the news was talking about $100. Then, when oil dipped below $50, the news started talking about $30. This, my friends, is why we trade the charts, and not the news!
It’s not driving season yet, but the colder weather predictably appeared as a drawdown in distillate inventories on Wednesday. But leave it to an old oilman to put the bottom in for crude. Right after we called a bottom in oil, President George W. Bush announced his plan to double the U.S.’s strategic petroleum reserve and, even though it won’t kick in for another contract, it’s pretty well made sure that come next month, there’ll always be a bid. Insurance for an attack against Iran, or cronyism and manipulation of the market through extra-legal channels, the so-called facts are classified for national security reasons.
The point is that we want to make some money and I indicated in last week’s update the move to $60 might have already begun. This chart here shows the Fibonacci projection at work in the crude futures and why I was getting bullish just as the rest of the world was ready to flush the whole thing away. Can you guess my target?
Dominick Mazza
Trading the Charts
Dominick@tradingthecharts.com
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This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.
