The pre-season is over. Let the real games begin. It’s been a long hot summer, especially in my neck of the woods. When it’s over 100 degrees everyday it does make the dog days of summer a little tougher to deal with, but the kids are back in school and everyone ought to have their game faces on.
August was a month where you look for clues as to what you can expect from the most important trading months of the year. This year, markets became very oversold due to BKX weakness. The banks topped in July, for all practical purposes the rest in August. That bearish divergence does not sit well with me, especially when that action took out the July low. As we know, that low came in on a fairly good Gann calculation. Those of you who’ve seen Tech Talk in the August hard copy edition of the magazine know the rest of the market hit a high in the 144 week window to the offset top in the NASDAQ from the end of October 2007. There are reasons to think September and October can cause some serious indigestion. The least of which is the seasonal factor, which makes September the weakest stock market month of the year.
While we are on the subject of seasonal factors, the end of August is also supposed to be a seasonally good period; given it is a vacation/volume challenged time of the year. Throw in the fact this year the pattern had us 89/90 trading days off the April top and you do have a recipe for more bullish activity. I had warned you of this potential 2 weeks running and it finally kicked into gear. Mind you, it kicked in on the final day of the window at about the time almost everyone gave up on the possibility of it ever materializing.
But materialize it did and not in a small way either. By the beginning of last week I was of a mind that said if all the market could give us was such a paltry bounce, we were in deep trouble. Many times, we can judge a pattern not by the drop but by the quality of the bounce. So if Wednesday through Friday was just half hearted attempt to take prices higher, I’d have come to the conclusion we were in technical very deep water.
But that didn’t happen. For last Wednesday’s big day, the NASDAQ’s +62 came in near 2.1b in volume which wasn’t great but it wasn’t terrible either. For a real kickoff to a new leg I’d have much preferred to see 2.5b plus, but we didn’t see 1.7b either. That means this new pattern has a chance to stick around for a while. I can use 2007 as the example because we had a completely oversold condition by the middle of August and markets too their time to work off the condition, not topping until October 11 and then the 31st for the tech indices.
The question is how long can it stick around? There are 2 possible scenarios. The first one has the US Dollar with an intermediate level time window on Wednesday. In the early action it’s looking like it’s attempting to bounce and while Tuesday is close enough, we have to watch for an inversion of the cycle. If the Dollar puts in a weak bounce into this middle of the week window, it leaves the door open for a fresh low, lower than the August low of 80.17. If that happens the stock market has a window to rally right up to the autumn equinox. The September 22 window is stronger this year than usual simply because it lines up perfectly with the April 26th high.
Given the fact the markets did respond, are showing that bulls have a pulse and bears don’t have the complete stranglehold it looked like they had only a week ago, it may very well have profound implications for the September/October time period. What we do know is between the 2 tops back in October 2007 is we are coming to the 161 weeks off that pivot. That is a significant time window and we start hitting it in the middle of October. I tend to favor anniversary dates and November 21st does come to mind as the 2nd anniversary off the NDX bottom. If something sinister really is brewing, it’s very likely to happen between now and the 161 week window. If it doesn’t happen in this window, it’s not happening this year.
How can I be so sure? How many times does the market crap out over the Christmas season? You just don’t see it and anytime we have had a weak Christmas it’s because it extended itself from October. My point is we don’t see the origin of a massive selloff between Thanksgiving and New Year’s. What happens January 2nd is a different story but that’s next year’s news and I think we still have our hands full with the current state of affairs. The current bounce appears to be strong enough to rule out the worst case scenario for this seasonal period which is a crash.
It was either Thursday or Friday I saw the guy who invented the Hindenburg Omen interviewed on CNBC. In my mind, the fact we are having a discussion about a crash should be important enough to peg the chances of a crash this fall as the lower probability. Crashes are panics. Panics happen when everyone heads for the exits at the same time. It usually turns out that way because nobody is expecting it. Think about it for a minute. You are in a movie theatre or club watching a concert. If there is a fire drill, everyone can exit in an orderly fashion. But if something catches fire very quickly and nobody is prepared that’s where people get hurt. I think people are watching for a panic this year. That’s doesn’t mean we can’t have a selloff. In fact it’s the seasonal time where it is the higher probability. All I’m saying is it appears that bears don’t seem to have the will at the moment.
Finally, I’m looking at a long term chart of Copper. Most of you have never seen this chart but here’s a sneak preview of the kind of charts my subscribers see on a regular basis. This chart shows the pitchfork of Copper for the past 10 years. The parallel warning lines at the top contained the long bull market. As you can see, we are once again at long term resistance. If we are repelled at the long term warning line then the bearish scenario for the autumn is likely to materialize. If we break through and hold on, that would be incredibly bullish. The reason we are looking at Copper is I think it is the best economic forecaster of recessions. If the price action can survive this level of resistance it would mean things aren’t as bad as they appear to be. You can do anything you want with statistics but the chart never lies.
Click chart to enlarge
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.