Last week school was back in session. No, I’m not talking about those institutions of reading, writing and arithmetic. School was back in session for us, too. Every year we get lulled into complacency by the lazy, hazy days of summer. They tend to get hazy when important players are absent the last week of August and it becomes a crapshoot for the first couple of days as the calendar turns to September. Never has that been truer than last Tuesday. The week started with a gap up and all looked good. The prior Wednesday had the bulls on the ropes but the bears couldn’t put them away.
Suddenly, it looked like this September was going to break the streak of lousy Septembers.
Or did it?
As the day wore on, price action seeped lower until the gap was filled but it didn’t stop. By the end of the day the NASDAQ finished at the lowest level since Aug. 6. When you consider the gap up, that is not easy to pull off. I’d tell you last Tuesday were a key reversal day but we were already in a downtrend. Tuesday was the 11th day of the trend.
What was more significant for tech was the NASDAQ/NDX pulling away from the 200-day moving average. As the week wore on, the 61% retracement of the last leg up fell as well. Now we have a situation where the July low was taken out and a retest of the bottom appears to be the next order of business. Since the NDX closed in the vicinity of the July low, Monday must be a complete bullish day to prevent a test of the bottom from materializing. The COMPQ is a little different since that already tested the March low in July. Anyway you slice it; we are at the bottom end of the range.
What does it all mean? You know we’ve been tracking two key sectors since the middle of July. Their activity will tell you everything you need to know about these markets. I told you to watch two lines. Watch SOX 360 and BKX 60 for future direction. One of them held and one didn’t.
The way this has played out means we have a sea change in the behavior of this market. Our main concern during this whole bear was the 262 week top last October. I told you six months before the fact we had the chance of creating the most important pivot of the decade. That pivot got a name and it was called the subprime mess. We had the banks and housing leading this bear. Now word comes out the government is set to bail out Fannie and Freddie in what is scheduled to be the biggest bailout in the history of the country. Last week I told you the country appeared energized politically no matter who gets in. To me, it had the ‘feel’ of 1980. I’m not predicting a grand new bull market but what I am saying is this has the feel of the beginning of the end of the bear. If it turns out we are some kind of 1966-82 style market, then the beginning of the end of a significant phase of the bear. Folks, they don’t do massive bailouts at market tops, they do it at bottoms.
We didn’t really have to rely on a news event to know that banks have been in a better position technically as have the housing stocks. In the overall cycle picture, we had the 34-day window off the July low last week. Many stocks came right up to their 200-day moving averages on this window. If they were going to be hit, that was the time and place for it. Many stocks did get hit. Tech got hit really hard. The SOX did not hold any support line. What has materialized is a more conventional type bear with tech leading to the down side.
When we have a situation of the banks leading up and tech lagging you may continue the bear but we have to see if the test of the low holds. On the other hand, if you have tech leading to the upside it almost guarantees a significant rally. This is not the case.
Now let’s get to the fun stuff. I’m writing this on Sunday night with the benefit of the Fannie/Freddie news. It seems to me this could be confirmation of the bottom of housing and banking as we suspected. That’s all well and good. The charts were suggesting it and now news events confirm it. What is equally important is the fact that with tech turning up, we will have a successful test of the low from March/July. If tech doesn’t fade out in the next couple of days, that becomes a high probability technical condition which is confirmation. But we still have to watch if the SOX is going to participate because if it doesn’t, I wouldn’t anticipate any successful upper testing. One thing you can take from this event is tech should go back to the top of the range it just came from and housing and banking should gain significant momentum from all this. I took a snapshot of the banks before this news hit as of Friday’s close and you can see how conditions were favorable for this sort of news. While this news and technical development is very significant, let’s keep our feet on the ground and realize this new leg is being led by banks and not semiconductors.
This week I’m back on the road. I’ll be at the Forex convention in Las Vegas next Saturday in the Interbank Booth at 11:00 AM. The Forex convention is at the Mandalay Bay which was voted by the Travel Channel as having the best pool in Las Vegas. There’s still time to come out, the weather is nice and the information is good.
Jeff Greenblatt, trader, author of Breakthrough Strategies for Predicting Any Market (Trader’s Library), a regular contributor to Futures Magazine and an expert in Fibonacci analysis in the markets, will be presenting a Web seminar on Oct. 28 titled, The Fibonacci Code: Unlocking the secrets of the Russell Index. Sign up now for this web seminar where you’ll learn how to apply Fibonacci analysis techniques to the Russell Index on a short term-basis.
