Nothing bad will happen to the market without bank leadership on the way down. The first time that mantra appeared was Christmas time. It became even more appropriate after we hit the small peak in January. The banking index consistently refused to confirm the January/February phase down. If we throw out what we know about the dollar and euro, all other things being equal, this round is different than the earlier pullback for one key reason:
The BKX has been leading to the downside.
So we can take the corollary and tell you nothing good will happen while banks lead down. But Friday was an important day on many levels but mostly because we finally got a really good test of the Flash Thursday low. As I told you before, Flash Thursday went exactly where it was supposed to. There was nothing abnormal about the technical conditions created by that strike of lightning. That statement does not apply to Procter and Gamble or the group of equities that traded down to a penny, but that’s a different story.
So Friday’s test finally arrived and we ended up with an interesting divergence where the BKX, SPX and Russell 2000 made a new low while the Dow and NDX did not. For that matter neither did the SOX. Its instructive to realize the very best readings I had at the Flash Thursday low was on the SOX and NQ. You’ll recall that by the time Flash Thursday bottomed the NQ had averaged 1.62 points per hour at that low. Those of you who are still trying to put your brain around what my readings really mean keep in mind I’m just using the basic laws of physics. A reading close or at an important golden spiral or geometric number carries a lot of weight and it takes a greater force to violate it.
That being said, any meaningful violation of Flash Thursday could end up causing serious technical damage to the market. In my mind, if the Flash Thursday readings are violated the market can go A LOT LOWER.
That being said, we come into the new week with a mixed bag. What this test has given us is a bullish divergence for tech and in the next breath a non confirmation of new lows in banks. But it’s a good news bad news scenario.
Which do you prefer first?
I always want to hear the bad news first so here goes:
The BKX has been leading to the downside. Yup, that’s the one that broke. I double checked and found the BKX had decent readings at Flash Thursday but not great like the one on the NQ and SOX. On Flash Thursday the BKX was averaging .108 points per hour which those of you who follow Gann will recognize as at least a semi important geometric number (see chart).
It used to be that it was the SOX that led the market up and down and we lived and died with technology. So when we see it was tech that did not take out the low, in the good old days that might have meant this correction was over. Those good old days were pre 2007 and unfortunately they are gone forever. The new leader is the banks and when tech does not confirm a new banking low it usually means bounce and not reversal.
So what’s the good news? We are probably do have a chance for a low here. It could have been a lot worse. The banks could have had that 1.62 reading which is more powerful than the .108 it did break. Had the banks materialized a 162 derivative and violated it we could be looking right down the barrel of an even bigger decline than the one we had last week but it didn’t. What is also helping technically is the fact prices stopped at the 200dma.
I also have a lot of charts that are giving me readings and suggesting we could be on the cusp of a nice technical bounce. Mostly these readings show up in charts like Copper, Heating Oil and the commodity based Aussie Dollar. The Copper chart is probably the biggest ray of sunshine we have right now.
The Dollar and Euro have secondary readings which translate to a condition which means further gains and losses but probably not right now. I’m looking for a relief rally, technical bounce or something less than an outright reversal.
All of which gets me back to the discussion on the banks. Earlier in the year when the market started to tank it was the banks which gave us a bullish divergence. Now conditions might be the polar opposite. Let’s just say for the moment the market does give us that technical bounce. There usually is one important sector that becomes a dead give away by its non confirmation or non participation. I’ll be watching very carefully to see if the banks don’t participate. Let’s just say that with the information we have now we do get a nice technical trade in semiconductors, biotech and selected commodity names. That would be good and give us some relief. But if we see a nagging non participation by the banks it’s going to spell trouble. Even with the banks you have to break it down further.
We’ve seen the Wall Street names flounder while regionals have held up their end of the bargain. We have to watch the JP Morgans as well as the FITBs of the world. By the way we still have an interesting divergence as Heating Oil is telling me it should try to bounce but I don’t see the same good readings in Crude Oil. No discussion of commodities would be complete without a mention on Gold. It was a week ago Thursday I told my subscriber base and last Monday I told you I had the kinds of readings on the longer term Gold chart I’d seen in other commodity contracts that led to important reversals. Since I brought that to everyone’s attention Gold has experienced the largest % change drop since the December to February sequence and I don’t think it’s over.
Let’s say commodity stocks do bounce, the other thing we have to watch carefully is to what degree Gold and mining stocks can come back. In the longer term there are still storm clouds out there. I’ve seen all the bearish forecasts out there by some of my peers. I don’t think it does any good to concern ourselves with what happens next year or 2 years from now. I’m concerned with now. That being said, I do think there will be a test of the March 2009 bottom at some point. History suggests that with every bear market bottom, whether it turns out to be THE bottom depends on the retest.
If you are on the West Coast, I’m going to be appearing at the LA Traders Expo June 11-12. The 11th will be a Futures panel discussion with Dan Collins and Toni Hansen. We’ll give you our unique take on technical analysis. On the 12th I’m doing my own breakout session.
Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.
Lucas Wave International (https://www.lucaswaveinternational.com) provides forecasts of financial markets via the Fibonacci Forecaster and other reports. The company provides coaching/seminars to teach traders around the world about this cutting edge methodology.