How do you like the greenback? Now it’s performed better than anticipated. We anticipated it would do well but maybe not to take off like it did so soon. Overall, the inverse relationship to the stock market is still alive and well. There were plenty of warning signs to suggest the market was getting ready to turn. I’ve highlighted the most obvious in the Russell 2000.
Since that Russell chart appeared here two weeks ago, the index has been down six out of the last nine days for a total of 7.55%. The Russell had a multiweek pullback before until early November so it’s not like this is the most technical damage we’ve seen since last March. If you want to see a chart experiencing technical damage for the first time in a year you should check out High Grade Copper. In the current sequence, the uptrend lines have been meaningfully violated for the first time since the bottom. I believe there will be serious implications to that. We know that Copper is an excellent advance warning mechanism for future recessions. Since this is the most meaningful setback for the pattern, does it also mean we are returning to the Great Recession?
Not quite. Prices closed in the 304 handle last week and the 200 day moving average is at 277. So we still have some territory to cover. I also have other indicators, such as very long term median lines that won’t be touched until we get to the 270 handle. What Copper is telling us right now that the advance and the recovery is stalling but not indicative of a return to the bad old days of 2008 just yet. It’s also telling us this new pattern is something more than the pause that refreshes.
To be sure, some areas are getting hit much harder than others. Commodities are getting slammed as are oil stocks. But the biotech index and the banks still have not been hit too hard, thanks to the regional banks. But JPM and Goldman Sachs are getting slammed. If we take a serious look at GS we find it breached the 200dma last week which qualifies it to be back in its own private bear market. Goldman actually has what looks like a head and shoulders top where the neck was breached at the same point as the 200.
Last week we posted a chart of the EUR-USD and told you a key long term test of support would be the most important technical event of the week. It failed the test which is a major reason the stock market is lower. Why? The EUR-USD goes in the opposite direction as the greenback and as we can see on selected days the stock market is still allergic to a dollar that make progress going north. But if the Euro is moving inverse to the dollar, shouldn’t gold be doing the same thing? It is but in the last two sessions gold has not kept pace with the Euro and is actually testing and holding key support from December at the 1075 handle. When we compare the two important instruments that move inversely with the dollar we see that gold is not confirming the move south in the Euro. This technical condition is important because the December support level is the last guard at the gate to keep gold from falling all the way to 950. Once or twice a year, the metals threaten a serious breakdown but it never really materializes.
Right now, this could be the basis for bounce this week. It might take more than just non confirmation by the gold chart to do it. For once, we don’t have one of these long term critical tests to report but we have reached a very interesting level in the SOX.
The SOX is one area that has been hit particular hard since the 14th on the day Intel topped. You’ll remember that as the day Intel spiked near 22 in the after market but has dropped every since. In today’s chart, we have two pitchforks. One anchor forms off the July bottom and the other off a pivot in October. You can build a case both are reliable but the important point is the longer term set has been violated while the smaller degree set is only being tested. What that means to me is that if a low is recorded at this particular line, the bounce that materializes will be of smaller degree. But the readings do support a potential low right here. If for some reason prices do not hold here the 200dma is slightly lower and likely to hold support at least on the first test.
We’ve also discussed sentiment recently and we know our stock market media representatives who reflect feelings on the floor of the NYSE have not shown this new pattern much respect. Last week Bob Prechter appeared on CNBC and announced the start of a new bear market leg. CNBC attributed the late day market sell off to the comments of Mr. Prechter. I think Bob Prechter would be the first person to tell you he has no power to move markets. But that did tell me the idea if the all time bear thinks we are back in the bear, there is an element of fear and respect out there for the first time in this sequence. Traders are also getting concerned about the President’s proposed fee on banks as well as the new banking regulations being proposed. All that means is that fear levels are starting to build. As I’m writing this late Sunday night fear is not thick enough yet that people don’t think this is a buy the dip setup but we could be close.
In summary, I see enough charts repelled by longer term resistance and that means something larger is developing. Whether this is a return to the bear market, these are the kinds of predictions that do traders more harm than good because we can only trade what we see on the chart today, not some point six months out. There are some larger degree attitudes in mass psychology I do not like that I will cover in a future column but those attitudes do not suggest if and when the bottom will be retested but a retest can’t be taken off the table.