I want to thank everyone for your support this year and may everyone have a great holiday and Happy New Year. I’ll have an abbreviated column next week. Here is my year end issue. This was an incredible year that started off with optimism for the new President but the markets took a while to get out of the starting gate. I don’t know that people really understood the market implications when there was a very definite rise in social mood upon the election of Barack Obama. Regardless of what you think of the man and his policies, he is the first African American to be elected President of the United States. When you consider the country’s checkered past as it relates to race relations, it was that ‘giant leap for mankind.’ Everyone knows it was an important historic event but when the crowd changes gear, it happens on a sub conscious level.
I’m not political but it is my job to be a social observer. It has been said that Mr. Obama didn’t deserve the Nobel Peace Prize. That may or may not be the case. I’m not here to argue that one way or the other. But I am here to tell you it was an important event that materialized as a result of the rise in social mood. Why am I telling you this? Am I a shill for the President or the Democratic Party?
People who know me personally know that would be the furthest thing from the truth. I had a theory about this subject right after the election. I saw optimism on the face of the man on the street for the first time since the economy turned down. The country was energized. Individually every person had their own opinion of the new President but collectively there was a shift in the socionomic paradigm. In simple terms, I think the crowd was very proud of what they did.
I thought it was only a matter of time before that would be reflected in stock market prices. I remember writing about it at the time. The story of the year is the very definite rise in social mood which is reflected in stock market prices. This is a rally that has carried on for months and in the case of the NDX over a year. Overall, the markets may have bottomed in March, but the NDX bottomed a mere two weeks after the election. I believe this has something to do with the Obama phenomena. He is liked all around the world and as long as he doesn’t botch things up I think the world has hope for what he can do in the future. I think he is personally an important factor in a rising market.
I can’t prove that with any statistics but I do believe there is some connection. This time the rise in social mood goes deeper than just a change from one administration to another in a presidential cycle. People have invested a lot of emotion in this President and I have a hard time believing it would have been the same if McCain had won.
While this is an important factor it is not the only one. Here at the Fibonacci Forecaster we look to technical events as the key factor that drives markets. But keep in mind the technicals are the representation of the mood of the crowd. Fundamentals can only follow patterns and emotions. Another major component of the technical equation is the action-reaction similar to the events of 1932 when the country got a fresh start with Roosevelt. Markets dropped sharply and have rebounded almost as strong. In the case of Roosevelt markets stayed up for five years. I’m not saying markets will stay up for 5 years but I am saying the technical picture is strong enough that I doubt the lows will be taken out in 2010. I’m somewhat new to the action-reaction theory of price action but when I look at the situation from that perspective I’m not surprised with the way things turned out this year. So the crowd likes the new President who finally is not so new anymore. There are many challenges ahead and Mr. Obama has invested much of his goodwill and political capital in the current issues, especially Health Care. Roosevelt ran into difficulties and so will Obama if he hasn’t already. While job losses seem to have slowed, we have yet to see where the next boom is coming from. Mr. Obama has his issues and the market has more than its share of issues. So while I see a strong technical low I also see how 2010 can be rough if not extremely volatile. As much as the country liked Roosevelt, lows were eventually retested.
We have a Greenback to contend with as well as exploding debt which weighs down the balance sheets of the Fed and the consumer. Things are better but we aren’t out of the woods. The stock market which may indicate that important rise in social mood is still allergic to a rise in the Dollar. I find it almost humorous the media would think the inverse relationship would be over just because they may move in the same direction for a couple of days. It’s still a fact that most consumer and mortgage debt sitting on the books materialized in years of a declining Dollar. That debt has to be repaid and will be harder to pay back with appreciating Dollars that are harder to come by. It will take several years to work this off. Until this condition is worked off to any significant degree, I doubt the inverse relationship is going to change.
But there are hopeful signs. Over the weekend, the major mall down the road from my house was overflowing with people. The parking lots were packed with cars. I did not see this condition materialize at any time last Christmas season. I realize I’m in sunny Arizona and a monster snowstorm mashed the busy Northeast corridor where 50 million people reside. It’s bad luck that the majority of these chain stores sat in the path of the storm. But if people do intend to shop, they will get the job done as soon as the roads are cleared.
So for now, the chart I showed you last week offered up an incredible buy signal. My concern was for the price and time cluster that could have killed the rally. Recall I said that a move of 2.53 in 250 hours was something to be concerned about but I had a hard time believing it would kill the rally after such a nice technical event. Price and time relationships work the same way as price resistance on any chart. Many times, important support/resistance does hold but when important trends change, like sports milestones, they are meant to be broken. When they are broken (as in the case of the Dollar), it shows an important underlying strength in the price action.
The bottom line is I don’t think this Dollar rally is over and while I can’t know for sure, I think we are in the early stages. But nothing goes straight up and given the fact this is Christmas week, it would be a good time for the Dollar to back and fill. If markets tend to stay up due to Christmas euphoria, it would be a good time for the Dollar to test support levels. It will be in this test that we really know what we have. Right now, the chart shows you last week’s great buy signal and where we are now, at 360 hours to the pattern in a tight range between the lower rising median quarter lines to the pattern.
Here we are at Christmas week. Seasonally, markets don’t usually tank in the period leading up to Christmas Day. What is more likely to happen is a drifting pattern and those of you who elect to participate this week could see nice intraday trading legs, but not much in the way of technical importance. But if you are looking for a reason why markets could stay elevated here, the BKX offers such a pattern. This particular pattern has seen a drift down between the quarter lines but closed well on Friday. In the bigger picture, my concern is the lack of participation in the recent rally but you can see here that support has held. I think the best you can expect for this week is a test of the upper descending median line. There are 4 trading bars and this pattern may be the GPS for the week.
Finally, let’s say price action is able to test this upper line. There is no guarantee it could break through and we may have a brand new universe when we get to January. There is a lot of speculation on the part of money managers I see on television who think 2010 is going to be another great market year. They are not basing that on any real facts other than they are projecting the recent past into the future. If you’ve learned anything in your travels in the market, you should know by now the recent past has nothing to do with projecting into the future. Not after a huge rise. The stock market has been very good and it is just at the point when everyone expects the current trend to continue, the market throws us a curveball.
Overall, the year does give us hope for the future. I’m not in the doom and gloom crowd. It is very easy to extrapolate the future based on 2008 but I don’t follow the easy road. I don’t necessarily think the future will be like the past. There is a section of the crowd that expects gold to be at 4000 and the same for the Dow. I don’t buy it.
As a market historian I believe this President and the markets will be severely tested again at some point. You should also remember that 1932 is THE BOTTOM. It was never taken out. I get emails every week from people who are expecting to see new lows in the future. There is nothing that guarantees it. In fact, history suggests we may have THE BOTTOM IN PLACE. But that doesn’t mean it will be smooth sails. Technically, we should have another ‘reaction’ to the recent ‘action’ of this year. But that doesn’t mean we make new lows. I will continue to look for an intermediate term correction in 2010. If you are student of the markets you know every bottom has to be tested, this one is no different.
What better way is there to celebrate the holiday than to treat yourself to the gift of education. Our programs and newsletters will be on sale until the day after Christmas. Check out our new page at www.lucaswaveinternational.com at the Fibonacci News link. We have sample newsletters as well as my latest round of interviews from the Las Vegas Traders Expo. My book "Breakthrough Strategies" has received worldwide acclaim is now out in China. You can now see the cover in the Chinese translation.