Potential breakouts in a bear market rally are truly a double edge sword. Rallies always seem to come right up to the edge of resistance where if they go any higher, we have a breakout. Unfortunately, this is also the place where many of them bite the dust. This is where we find ourselves right now coming into the new week. We are on the verge of turning an economic corner or hitting another spectacular disappointment. Before we go any further, it is not lost on me that bear markets are designed to break our hearts just at the last minute. That being said, there are technical signs pointing in a new direction.
So let’s talk stimulus and banks. You can get all of the finer details in many places but I only care about one thing. In 1942 Hitler was at the gates of Moscow. His armies stretched across Europe all the way down to El Alamein. The Japanese had us on retreat all across the Pacific. France was already long gone. It was bleak, really bleak. Had Hitler captured Moscow or bombed London into submission, we could have been alone. All you need to do is look at some of the old magazine archives to sense the true fear of the times. Since that happened to a different generation, we don’t know it was like. We read about it in the history books and some of us look at old Dow charts but one must attach sentiment and emotion to give it life.
What is not talked about much is the fact that while Hitler looked invincible, he was very close to maximum industrial capacity. We had just joined the war in December of the prior year and getting warmed up. I don’t have the exact statistics in front of me but estimates were the United States was about 20-25% of industrial capacity at that time. As we know, the market bottomed in the spring/summer of 1942. The war still had 3 years to run and millions of lives would still be lost. What I’m trying to say is victory in WWII was far from a certainty but social mood turned up just when things seemed to be at their worst.
Why worry about the details of the stimulus package? The big debate on the Sunday cable shows was whether all of these plans will work. Let me put it to you this way. If the market turns up here, it’s going to work. I don’t care what is in those plans. To be fair, economic recessions and depressions are designed to correct every excess according to the degree of the correction. This one truly is the mother of all corrections as every excess dating back to the 1970’s is being trimmed. But the emotional side to this goes to extreme and the first step is a bottoming out of fear and the beginning of a new confidence. If the fear can subside, it would go a long way to helping whatever stimulus they are cooking up become successful.
That being said, we had another week where the NQ/NDX as well as other areas of tech stalled out at the same 1245 area from the prior week. By late Wednesday and early Thursday, the NQ was back at the same 1191-breakout gap point from the prior Wednesday. It was like a carbon copy of the prior week. What you can take from all of this is we had two key opportunities to crash and burn but could not or would not. Maybe the third time is a charm but the 1245 area was breached in a big way. The big way is the fact the news gave us another horrible jobs number but the market shrugged it off and gave us one of the best technical days we’ve seen in a very long time on Friday.
First we look to the Chinese Shanghai Index (SSE), which has made a breakout above October, November and December resistance levels. This comes on the heels of a three-month consolidation off the lows. This is not a V shaped bottom but a period where the possibility of a breakdown was a constant threat. It was a sideways pattern that could have gone either way but is in the process of breaking to the upside. The Chinese market is the most encouraging sign we’ve seen yet.
Getting back to our market, I told subscribers on Thursday night that if the NDX could jump a key vector line, it had a lane up to 1280. The same can be said for the SOX. It is certainly back in that lane now so these markets are starting to develop some internal strength. However, we’ve reached the critical point. The SOX has once again traced out what could be considered an ABC pattern with the A wave from the November low to the January high. On Monday, we are sure to hit January resistance but the key number in the SOX is 237. At that level the current leg that began in late January will be .618*A and that is a common failure point in bear market rallies. The equivalent calculation in the NDX is 1301. If tech can take out these levels, we will have a lane to at least the Oct. 14 high, which in the NDX is 1470. What that means is we are close to a major technical violation of common bear market calculations. We are likely to see the resolution in the SOX first and if that breaks through chances are the NDX breaks through as well.
Things are starting to look mildly encouraging. As a trader, I don’t usually have a rooting interest but considering the stakes for our country and economy are as high as they’ve been since 1982 I’ll be rooting for the bulls this week. When markets get to resistance levels one never knows but the pieces to the puzzle are starting to add up to a break of resistance levels.
Our premium newsletters are navigating these rough seas with a high degree of accuracy. We also offer tips on trading and mental toughness throughout the month. Trials are available at www.lucaswaveinternational.com. The time is also close as I’ll be in NY at the Expo on Feb. 22 as part of the Futures panel discussion with Dan Collins and Floyd Upperman. The topic is Technical Analysis in Event Driven Markets. Some people think markets are driven by news events, others believe in the fundamentals. I’m biased and will show you some incredible market precision, but we intend to inform and entertain you. Hope to see you there.
