You can make the argument this is the most important trading week of the year. Why is that? Is it because we have a new President? Are we supposed to have an Obama “Honeymoon Rally?” Could it be we are about to test the bottom? Maybe it’s none of the above.
Last week I thought we could see some neutral action due to the Inauguration and in tech that did end up materializing, just not on the day the new President was sworn in. Perhaps market participants took Justice Roberts faux pas as a sign, but the markets headed south during the President’s first speech. We don’t really believe that, do we? The truth is we had a market that finally had some technical damage the prior week and was following through on what it started. It could also be a tale of two markets since we have a banking sector that is intent on going lower with a biotech sector that is looking to continue its bear market rally. The challenge ultimately will be how strong the tide is and whether the biotech ship will be dragged out by the tide.
It appears the BKX may be tracing out an ending diagonal triangle with a target price near 23. The chart came to within a point and a half, is that good enough? Nobody really has an answer to that question but institutional traders will feel more comfortable with taking the long side of the banking equation if the chart were to trace out a ‘wash and rinse’ other foot dropping type of pattern. Another sharp spike down may wash out any stragglers who still haven’t sold at these levels and clean the slate in order for new buyers to come into the market.
Here’s the challenge coming into the new week. The NDX has stiff resistance right at the 1200 area. It gapped down there back on January 14th and tested it as late as the 16th, right before the MLK break. We spent last week in a zone mostly below that level but right above the December 29 low which was a key area of support that enabled the bear rally to break to new highs by January 6. The low on Tuesday was 1136 so we’ve been in a tight range of 64 points. Unfortunately, the stock market chart is still dependent on moves by the US Dollar for its own direction.
By Friday the Dollar finally hit a near term high and started pulling back to important support near 86 from a high near 87.40. No doubt that contributed to Friday’s sharp recovery rally. But the NDX stalled near resistance again and the initial pre market Sunday night action in the Dollar suggested it was not yet ready to break through support. If we put those two pieces of the puzzle together we have a tech sector that is not ready to break through to the upside and a Dollar that isn’t ready to break to the downside. That may very well change as the Dollar tests resistance again.
Friday was also a key day where the Gold market finally broke through a long standing resistance pattern of a trend line containing highs in July, October and the first week of January. In a departure from our usual stock market chart, I’ve highlighted the situation in Gold since it may have serious intermarket implications. Unless this is a false break, we get a retest of the line at about 875. If the Gold chart were to sustain a break out the dollar would turn down and the stock market would likely rally. We do have a close above pattern resistance on all Gold charts so as a technician you do give this condition the benefit of the doubt until proven otherwise. The only challenge was in the pre market activity on Sunday night, the Gold chart was coming back to Earth.
I’m not here to comment on any currency manipulation or how governments manage their currencies. I still believe as long as human beings are managing currencies they are subject to universal laws. Last week we had some sentiment that suggests the dollar could be near a high. We had two circumstances and one was comments by the new President through Geithner that he supports a strong dollar. What is he supposed to say? The other occurrence was the accusation that China is manipulating their currency. What that implies to me is we may be near an important turn as the dollar came very close to November highs which were very close to the 38% retracement level of the whole bear market.
This sets up the potential for some good fireworks this week. Nobody can be exactly sure what will happen but I think we have a high probability test of support areas in the banking sector. I don’t know that we go all the way to the low in the Dow and SPX but we certainly have a good chance of taking a shot at it. That means you can still get a spike up in the Dollar.
Finally, we are hitting the annual solar eclipse and while I haven’t completed my research to give you a statistically valid statement, in the past few years they’ve materialized near pivots in the market.
Everything I’ve mentioned has its importance. But if you believe January sets the tone for the whole year, this market has one more week to redeem itself. The opening tick for the SPX was 902.99 and coming into the week we are sitting at 831.95. Right now, we are on pace for another losing year. If we do get the spike down and reversal and close anywhere near 900 you can anticipate a neutral year where trading will be king. It certainly doesn’t look like it will be an ‘up’ year. If we can end up with a trading range type of year it would certainly be a step in the right direction and a welcome diversion after a stormy 2008.
