It was nearly five months ago I was asked by BuyTheRumorSellTheFact.com what I thought of the Flash Crash. You’ll recall there was lots of rumor and innuendo, led by one that suggested it was a ‘fat finger’ that pressed the wrong button which led to the big decline on May 6. With the exception of selected stocks like Proctor and Gamble, I found nothing improper about the irregular events of that day. In fact, most if not all of the indices I cover showed ‘proper’ calculations for the parabolic drop and recovery.
Now the findings come out and while they provide less than the comfort industry officials were hoping to find, they do uncover the fact that someone was attempting to make a big bet on the sell side. Of course, everyone associated with Wall Street is concerned these findings will erode the public’s confidence in the stock market. I wasn’t in a trade at the time of the Flash Crash and all I would hope for is if I had a stop in place that it would have triggered where it was supposed to. If you are in an E-mini trade and suddenly your stop is triggered 20 points below what you thought it would be, then there is a problem. If that proves to be the case, then even nimble minded risk takers such as me would think twice about playing in a broken market. Now if you are long the night before Lehman goes bankrupt and the market gaps down on the open then shame on you but in the normal course of business a trading bankroll should not be able to be destroyed by a stressed out market. Lehman might have been the news event that manifest but you’ll remember that was the 233rd trading day off the Dow 2007 top and there was no indication of a reversal leading into that event.
But this isn’t necessarily a bad thing. If the public’s confidence is still eroded by an event that may be classified by a lower probability ‘fluke’ then there is room for it to go higher at some point in time. We really can’t see the latter stages of a real bull market until the public does get involved. If you really study sentiment you know that nine out of 10 times the public is wrong about the market and if they aren’t coming in, then there’s a reasonable chance they are wrong.
But it’s not all good because we potentially had Flash Crash II just a couple of days ago in the Cocoa market. Prices fell about 8% in one minute on heavy volume then recovered just as quickly. According to a Dow Jones report, ICE Futures U.S. did not comment on the trade but said it would stand. We did our own research only to find the calculations are legitimate. They don’t offer the same level of symmetry as did the original back in May but it would appear the exchange made the right call given the fact the move was an exact 432 degrees in terms of the Gann square of 9. You can also see from the chart below how prices reacted to the parallel warning lines.
But my main concern for the week comes with the U.S. dollar which did not hold the near term pitchfork line last week. This is now a serious situation as the greenback has also violated our long term channel as well. A look at the longer term channel should paint a picture of just what the Fed and Treasury is attempting to engineer. Its common knowledge that banks are holding onto their reserves and not lending to any degree right now. As you know, I’ve stated many times in the past in this space the biggest danger we had was the borrowers who incurred that mountain of debt from 2003-2007 would have to pay back those Dollars in ever increasing harder to come by valued currency. That’s the main recipe for a deflationary depression. Now they are trying to stimulate the economy with cheaper Dollars. The main reason is that mountain of debt gets paid back with easier to come by currency. On the surface this would make a lot of sense, especially when you consider there isn’t a lot of new debt being incurred right now. The problem eventually develops because it’s the creditor that suffers as a result of being paid back with cheaper Dollars than it lent out. Finally, there comes a point of irreparable harm. Nobody knows precisely where that is.
But I have an idea. Here’s the updated long term Dollar chart. We had it in this space for six months when it was in the bullish channel. Recently, it broke this channel and is now subject to the intermediate term brown channel and the longer term blue lines. The longer term mid line stopped rallies three times in five years. At some point the dollar is going to bounce and in the very least it could do so now or in a week when it finally hits the 89 day window. I think the brown channel needs to be tested before this thing totally comes unglued. But if you are thinking a few steps ahead the fact the mid line proved effective gives one reason to think the longer term lower channel line could be effective as well. That line comes in around the 60 handle. I think the 60 handle would be a good target to end the long bear market. It doesn’t have to, of course. In case it doesn’t there is no real support below it until it gets to about 48. However, the point of our discussion for today is to figure out where that point of irreparable harm kicks in to creditors like China who then has to look at us like we are too big to fail. I think the line of demarcation to a serious hyperinflationary depression comes below that line.
These are just lines on a chart. But you’ll remember earlier this year when the euro started breaking innocent looking median channel support lines and news events like sovereign debt problems in Greece suddenly materialized. These lines are not to be taken lightly.
That brings us to this week. As I told you previously, I thought we had an inversion of the Autumnal Equinox cycle at least in technology. As of right now, the banking index has an official turn right in that Equinox window. So we have a split market. Tech is still looking good with banks and housing as the laggards. For now, they don’t look like horrible laggards, just more neutral than anything else. Markets are grinding sideways to slightly bearish. This isn’t bad considering it’s already October and we just had the best September in 70 years. I think technology is going to be hard pressed to go higher from here and while I think they likely grind lower, they’ve missed their bearish launching pad opportunity in September. The way things look right now, I’d rate a panic this October as a lower probability event.
Click charts 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.
