Welcome to August, the slowest trading month of the year. Well, it was looking that way for most of the summer. But markets have a way of not performing according to expectation. Markets will do whatever they want, whenever they want. As we cruised through July it looked like this would be the run of the mill type summer we’ve pined for; anticipating the good old days of 2004. But we did not get that benign pullback I admit I’ve been rooting for.
Nor did we get that push by the dollar into the middle of the trading range.
Everything has its own implications and such is life. The event that materialized on page 30 of that novel you’ve been reading by the beach all summer does have a payoff on page 300. The stock market has had its chance to pull back throughout the summer, the last best chance on July 27. The early June-July sequence also had its chance to continue sideways but did not. I’m working at not being the Grinch that stole Christmas?
I’m not pouring cold water on the rally. Believe me, we’ve taken care to out quite a few winning long plays for our clients this summer, that’s not the point. We always follow the pattern. But you may have seen my 2¢ worth in the Tech Talk page of the August Futures (page 22). We are loaded with time windows this month and my concern is August seems to end up being a pivotal month for better or worse. In this decade alone we’ve seen important lows take place in 2004 and 2007. We’ve also seen rallies dry up in 2000 and 2008. So it’s been my take ever since June markets would be setting up to propel higher IF they weren’t peaking into August. But we have and maybe that’s not such a good thing.
Now it looks like we could be losing the support of the most important ally the stock market has. I’ve continuously marveled at the way the Copper chart keeps propelling higher. It is one of the best looking charts I’ve ever seen. Day in and day out you could not ask for a better looking pattern. The fact Copper materialized like it has after the financial system almost fell off the face of the earth has to be one of the great stories of 2009. But it is showing signs of weakening again. It started pulling back after a rise of approximately 156 points in 157 days. Have you seen the POT chart? That one hit a price high at 121 in 121 days which is exactly the kind of squaring action that kills rallies. Copper isn’t quite like that since the price high is in the 280 handle but anytime we see this kind of squaring action we have to be on notice.
We may have also had an important turn in the BTK as it has backed off the recent high. It has given us a square of 2.234 off the November bottom. For those of you who don’t know, in sacred geometry Root 5 is 2.236.
The various indices are also giving us important square relationships percentage gains at the highs. For instance, the NDX is up 60% since the November bottom. Nothing is set in stone but these charts have a way of turning if they are sitting near 61% when the time window hits. The Dow is up 45.8% which is also the kind of handle that can stall rallies. If you doubt any of this, our clients see these percentage gains on all the charts up to 100 times a week in all degrees of trend.
We have bottoms from March 6-9. The first calendar day at 160 hits on August 13. Obviously, the charts that bottomed on the 9th start on August 16. Since the window goes to day 163 we are looking at a window that runs until the 19th. But we also have another one that started on Friday and expires today in the form of calendar days 260-62 off the November bottom. That window applies to the NDX, BTK and the SOX.
Don’t you wish you were still at the beach?
We have our work cut out for us this month. I didn’t even touch on the greenback yet. Friday was the first day in recent memory both the dollar and stock market rallied up together. It has people scratching their heads and it should. On the surface it would appear this is the best of all worlds. I’ve been rooting for a mild rally in the dollar so we could get that mild pullback in stocks. My personal feelings have absolute nothing to do with my professional work in case you were wondering. The logic was a dollar rally would allow the stock market to set a pivot low in August that would propel stocks higher. Instead, stocks went higher without that pause. It took the dollar to get all the way to sentiment readings of 3% bulls for it to turn. In case you were wondering the greenback dropped 14.6% (Fibonacci derivative 14.6) and squared out at .123 (Lucas 123) at the low. Now it’s testing overhead resistance but with 3% bulls, there weren’t many sellers left. My concern is one day doesn’t make a new trend and if the dollar has legs here the stock market can fall quite a bit.
At some point the stock market is going to have to retest the bottom. I’m not saying its now but not many are expecting at this time. The folks on CNBC are already calling this a new bull market and for the life of me, my models have come close to confirming that but HAVE NOT DONE SO YET. Stock market history suggests that patterns like the one we’ve had since March are designed to fool the crowd into thinking a new bull had a coronation only to set the big trap. I get nervous when I see business journalists trumpeting a new bull market. They ought to know better.
After August comes September and October, perhaps two of the lousiest stock market months of the year. It’s time to be awake, its time to be cautious and look for the unexpected. We are not giving you a red light yet; I see flashing yellow lights this month and can no longer sound the all clear.
At Lucas Wave International, we are unveiling our pre launch to our new web site this week with our new format for our newsletters. The new format will incorporate the text with the charts. Those of you who’ve been following my work back to the old Stockcharts days know we had dozens of charts and sent the text out separately. The first incarnation of the web site kept to that format but due to reader feedback we are finally switching over.
