The follow through which was necessary to confirm a near term bottom materialized last week. As you know this was an anticipated event here. It is my view that conditions no longer existed for the market to come apart at the seams like many believed, at least for the duration of August. First of all, this is high time for vacations and pennant races. Characteristically, the last two weeks of August are usually a time the markets spend wasting time and setting up for the next move which could come as early as the day after Labor Day. This week should be no different as many make their last trek to the beach for this season.
But it was an interesting week as the markets first struggled to get above the Fed high from the Friday before and finally ended with a statement day to close the week. It now appears we do have enough gas in the tank to create a new or secondary high heading into our cycle points in September.
The challenge I've had the past couple of days is determining if and where a shakeout test of lower resistance would materialize. I believe we've gone too far for a test of the lows but I thought it was reasonable to think we could have had a test of the lower 61% retracement levels on Friday. Thursday was a day where we topped near the opening bell and spent the rest of the day either going down or sideways. The activity after the low didn't instill any confidence in me because the NQ chopped around just north of support. It actually had the look of a B wave in a smaller ABC down. But on Friday support held and we had a very strong end to the week. Usually the information we get at the end of one day is a very reliable indicator of what to expect the next day. This really wasn't the case on Friday because in the first hour of trade the intraday readings on the put/call ratio skyrocketed all the way to 1.48. This is very rare considering they were at least .40 lower the day before. What this indicated was options bears were out in force and there really was no room to drop. Consequently, the rest of the day was spent working off that reading as the markets made the surge higher. The final intraday reading was 1.07, which also turned out to be the daily number as well.
Here's where we stand coming into the week before the holiday. We hit the 61% retracement level of the whole move down in the NDX and are close on the other charts. This is the exact minimum requirement for the technical purpose of this leg. Last week I outlined for you that on a technical basis I was looking for a leg that would test anywhere from the 61% retracement levels to the July top. It is a positive indication the NDX got there first, which tells me that tech is leading the market once again. But here's where it gets dicey. We don't know how it’s going to respond to this level. Friday morning we had a decent time cluster at the point the NQ hit a smaller 61% retracement level (of Thursday's drop) and blew right through it. The SOX is lagging near the 38% retracement. This isn't likely to conclude in a bearish payoff just yet but a SOX that continues to lag will have to be reckoned with at some point down the road.
Now the cash markets are 45 hours off their bottom and the NQ is 58 hours off its bottom. What we are looking at on Monday morning is a test of the 61% retracement levels across the board either on the 47 (Lucas) hour window or the 61 hour window in the NQ. What that means is you need to watch the first half of Monday's session very carefully to see if these charts are going to survive this price and time cluster. This has been an all or nothing market but tendencies suggest this would be the place for some corrective measure to kick in. Let's assume a corrective measure does kick in; we will either have a flat or sharp. If the pullback is flat, it almost guarantees a return to the July highs. A sharp correction will be more complex. That would open the door to a retest of the 61% retracement going the other way.
However a sharp can also open the door for a larger sideways consolidation that may keep this pattern going into the larger cycle point in late September. If we were to form a larger degree flat pattern or a triangle here, it may not terminate until late September. On the other hand, if we have a small correction this week, it is conceivable that we get to upper resistance right after Labor Day. Keep in mind the larger weekly cycles become active right after Labor Day. This doesn't mean whatever event is materializing has to commence at that point. The last time we had a large cycle point on a weekly scale was the spring of 2006. There were 3 high probability dates for the turn and the markets elected the very last one where the rubber band was stretched to maximum capacity for euphoria.
This time our highest probability date is where the two cycles overlap around Sept. 21-24 which includes the Autumnal Equinox on the 23rd. Nobody has a crystal ball. What we do have is the charts and what can materialize this week is the setup which can give us a clue to how long this move off the August 16th low is going to hang around. Things have settled down for now, this could be the calm before the storm.
I'll be back on the Commodity Classics show again this Thursday at 3:45 CST. Next Monday is Labor Day so look for this column to appear on Tuesday instead. Last week we discussed how the setup for the low was very similar to the charts in my book; there is never a better time to have this fine market navigational tool at your disposal. As you know, you can get it right here at the Futuresmag.com bookstore.
