In my last update I told you I was looking for a bounce that was more substantive than what has materialized. I know you are playing many different instruments and it would be impossible for me to keep track of them all. I gave you a proxy to gauge the market. The area of most interest was on the NDX chart at the gap down from Nov. 8-9. This level also coincided with the 38% retracement of the drop thus far.
As we know, the markets hit a low at the 61-day low to low cycle with the major August pivot. This is a very important tendency for all financial markets. It doesn't necessarily mean we could have bottom, but it is a place markets will attempt to react. If we are still in the bull, this most likely would represent a bottom and we'll know it. If we are in a new bear market, what you'll see is this time window acting as mere turbulence on the road to a larger developing pattern. Rating the strength of a pivot can give us a tremendous edge on what to anticipate next. I know much of that sounds like psycho-babble and it doesn't do any immediate service to your trading account. However, you need to keep that bit of new information in the back of your head.
What is of immediate concern is that 38%/gap discussed above. I look at areas on the chart like that as important resistance. Those of you who are swing trading this drop are obviously looking for something more and shouldn't give up your shorts just in case we are in the early stages of a larger correction but on the other hand you always need to protect your profits. Under no circumstances should you allow a winner to turn into a loser. With that in mind realize that strongly trending markets respect that 38% level. We've talked about this condition many times in the past year when you were advised to hold longs during pullbacks with the proxy at 38%. Nothing is perfect but this strategy has worked more often than not.
Since I am on the road I left you with that one area of interest for special consideration. Okay, so what happened? The low on the 8th was 2106 and your high on the 14th was 2092. So far it’s holding. But we've also moved four sessions down the road from the low and that's holding as well. Let's just say this bounce up to the new week has done much better in terms of time as opposed to price.
What to look for now? Two points of interest. We put in a nice white candle at Friday's close in the 29th (Lucas) hour off the bottom. This implies a potential break to higher prices. Next is the condition on the SOX. On Monday it will be 88 days off the July pivot. It has continued lower away from its intermediate term neck line at 465. Some of you may recall an intermediate term break to the low 400's was the highest probability outcome and I also told you that a long term trend channel could provide support between 410-420 without upsetting the longer term bullish pattern. We should be there by Monday or Tuesday. If we get support in the SOX in these general areas in this 89 day window, the 61 day low to low cycle may turn out to be more important than some people realize. What's also interesting is that while the SOX has dribbled lower, it has impacted the markets but the NDX has not violated time support. If the SOX were to bottom here it may be time for shorts to cover.
The other condition that's vital to your interest is our overall proxy to the yen carry trade condition which is the December yen futures contract. It has broken above summer resistance but has not given us the indication it wants to stay there. What is going on now is a test of polarity at the .89-.90 level. Before a chart can accelerate into a longer term bull market, it needs to retest former resistance levels to build that foundation. I am looking to see if it will build a base in this area. If it does, the yen carry trade condition may be permanently over. That would be very bearish for stocks. But it hasn't happened yet and it may not complete its test on your time schedule. I would not like to see those of you with decent short profits give them back while all of this is going on.
A break to the upside beyond the 2106 level in the NDX would be telling us it just doesn't want to go down anymore right now and is will test the upside. From the look of Friday's closing action, it looks to me like it will be retested again. This is a short week. There will be the usual Tuesday night update but I will be shutting it down for the holiday. I wish everybody a great Thanksgiving and wonderful holiday season.
