Are you comfortable with the new trend in place? Don’t rest on your laurels just yet. The bears are out there predicting their doom and gloom scenarios as usual without a proper appreciation for what is materializing on these charts. Just when you think its safe to be short, don’t look now but the rug might get pulled from under you. I’m not predicting a bottom here but there are some serious warning signs a bigger bounce than what materialized last week can happen this week.
But before we go ahead, let’s look back at the past week. Last week, in this space I told you the EUR/USD had violated long term support on a monthly basis. These lines of support are mostly invisible to the uninitiated. Most people are looking for support back at the consolidation period from last June and July which is the last the time the Euro was at this level. That’s fine, its good support but its not LONG-TERM SUPPORT. It certainly isn’t the kind of support that when broken should illicit calls for the demise of the Euro. Funny, how just a couple of months earlier the same people were predicting the demise of the dollar. The reason the euro is getting thrown under the bus exists now is just because support on the long term weekly and monthly charts have been broken in terms of the median lines. We even have people on CNBC who think the euro is in a downtrend with ‘no end in sight.’ When you hear people talk like that the end usually is in sight. But a brief review is in order.
Going back to last Monday, there was an intermarket divergence where Gold came to support at $1075 and did not break. It’s not an obvious inter market divergence because I’m looking at two charts that generally move inverse to the U.S. dollar. Gold didn’t break and that told me we were ready for some kind of bounce. We got the three-day variety but by Wednesday night gold and crude oil had excellent price and time readings on their bounce which is bearish as it meant the bounce was at or very near completion. As you know, at least two or three times a year gold threatens a serious breakdown but it never seems to happen. This time support was violated.
At the same time gold was failing the indices did not have great readings and the NDX was sitting below overhead resistance it easily could have slammed into on Thursday but did not. That was a lower probability because of the proximity but still didn’t touch it. I would have given the rally at least another day but in my STU I wrote at the time there were storm clouds developing. If you caught Art Cashin, who I might add is my favorite personality on CNBC, he said Thursday’s action was due to, “The dollar having a margin call.” His wit was right on the money. However you slice it, Gold dropped big, the Dollar had been setting up on Wednesday night and the intermarket divergence from Monday morning was a footnote to the larger pattern.
There it was; the work of the dollar, euro and gold that dragged down the stock market. It dragged it down so well that the NDX could not even hit overhead resistance.
But now the dollar has hit my intermediate level targets and has decent readings at the new high. If you noticed, late Friday the stock market indices built skyscrapers on the 15 minute charts. The SPX picked up 13 points on a single 15-minute bar. That doesn’t happen very often. Everything else on the hourly is showing the week closed with a very healthy looking morning star formation. What I wanted to know is whether any of these charts are confirming the high in the dollar. The euro is not, gold is not, the SOX is not but the NDX has a perfect reading on the hourly off the top. The best explanation I have for the banks in the form of the BKX is the chart is 450 hours exactly off the Nov. 2 pivot low. So we have a turn on a 450-hour low to low window. The readings are not there.
But we have a perfect 1.414 sacred geometry root 2 reading on the NDX which means the NDX is down 1.414 points per hour since it topped.
So here’s where we are at. The higher probability is a technical bounce and even a technical trading rally right here. Notice I do not mention bottom but I was looking for one chart to match the Dollar and I found it. But just because we have these readings it does not guarantee a turn. Our job is to manage uncertainty and these readings, coupled with the Dollar hitting upper median line resistance makes this an 80% probability. That leaves the other 20%. What that means is if these readings were to go by the wayside and the dollar extends here without pullback is something extraordinary, even historical could happen. Due to the fact the euro broke support on a monthly basis, the headlines are leaning to some sovereign crisis developing. I can’t rule it out. But that’s what it would take for the dollar to extend at this point. Keep in mind, the dollar could rally by default if the euro keeps dropping and the euro broke support before the latest fears of sovereign default rose to the surface.
As traders, you may want to anticipate the extreme and sometimes it happens, but most of the time it does not. What that means is if your own money is on the line, you play the probability and anticipate the bounce. So I’ll end where I started and state that while you may be getting comfortable on the short side, expecting a disaster is not the recipe for making money as a trader. Playing the probabilities is a far better proposition.
On Sunday night the world turned on its axis and the Saints won the Super Bowl. I’m happy for the city of New Orleans but as a lifetime fan of the NFL I never thought I’d see this day. That also means anything can happen this week. While we had major violations last week I know many of you are just settling in to your short positions. Don’t get complacent because sentiment for the euro is getting incredible negative in almost lightning speed. What people don’t understand about playing the short side is bear phases are very intense and prices drop much quicker than the climb. You should be ready for the unexpected, a move going back the other way.