It was early last Wednesday morning when I flipped on the tube and fired up the charts to see a lot of green on the screen. Sometimes I’ll fire up the banking chart immediately, sometimes not for 20 minutes. Some days it just depends if I’ve had my coffee yet.
But last Wednesday morning was one of those days that I fired up my NQ chart and opted for the coffee. By the time I was in full gear I was certain the BKX was sailing along with everything else. As you know, the BKX was hovering around important resistance levels set up by the high back on September 21. In that important sequence, the NQ and leading tech stocks inverted the time window while the banks topped. We’ve had a split market since then. So here it was Wednesday morning and we were so close to getting the all clear for a major rally.
We have a great tech rally and it can keep going if banking stays neutral or stable. But if the banks turn it’s going to end up taking tech down with it. We’ve lived with those conditions for the past 3 years. We are going to continue to live with them until the market proves otherwise. My gut instinct tells me that paradigm is not going to change anytime soon.
The first thing I saw on Wednesday was the banks were non participants in an otherwise really good day. I’m not the only one that observed it, but it’s a reality not to be ignored. Step 2 came Thursday with some follow through. Step 3 came Friday with a violation of the median channel in place since this rally started at the end of August. They were above September 21 resistance for all of an hour.
I’m concerned. September and October were great and for the most part took away the technical launching pad for the market to do a bungee jump this October. The big turning point came at the Autumnal Equinox where tech used it as a staging ground to go higher. The only problem is banks didn’t come along for the ride. In case you noticed, October is not over yet. As you know, we represent the Dick Arms School of technical analysis here. You have people representing the fundamentals, Elliott Waves and plenty of other methods for the markets. We’ll never hesitate to go with the technical guy who has his name on the wall of the NYSE. What that means is the pattern encompasses all fear and greed as well as everything else you ever want to know about a specific chart.
What the banks are telling us, if we watch and listen, is something is wrong. I have an idea what it is. It’s beyond the scope of our technical update to describe in great detail what the news event that might materialize could be. However, this is one of those rare times that I will suggest you read this week’s edition of John Mauldin’s Thoughts From the Frontline Weekly Newsletter. In this edition he describes what could be coming in round 2 of the sub prime mess as well as a good explanation of why Bank of America suspended all foreclosure proceedings. I look at the chart and can see something is wrong. His research, which is beyond the scope of what I supposed to do here, may describe what really is wrong. However you slice it banks have broken support lines and not confirming the party in Apple or Google. Speaking of Google, just put Mauldin’s name in the engine and I’m sure you’ll find it.
The next issue on our agenda this week is the US Dollar. It rejected the next time window at 89 and 90 days off the high. It concerned me because price and time square at 89.55, the old high back in June. Now its down about 13.20 in 130 calendar days so it has another opportunity but it has violated so many levels in terms of price and time that it leads me to believe we may not get a real important turn until the one and two year anniversaries of the old high and low in 2008 and 2009 in late November. The Greenback is so beaten up, so universally disliked that it’s nearly that time for it to turn again. It seems like once or twice a year the Greenback gets to such an extreme that it finally does turn. However, the readings can persist for days or even several weeks before it does.
We know that higher probability is when the Dollar finally does bounce that equities likely will sell off. There is still time for the market to have an October flop. Many people are finally convinced the rally is going to continue. But I must remind you this remains a split market and only one portion of it is in real rally mode.
We also know that because the Dollar has dropped like a rock that a lot of commodity names are doing really well. No where has this been felt more than in the grains markets where I can’t remember 2 limit up days in Corn since I started my Lucas Wave International web site. I think this is the first real place that serious inflation could be felt given the fact you’d be hard pressed to find a food product in the market that doesn’t contain corn, wheat, sugar or soybeans. Rough rice looks like it could be in the early stages of a new secular bull market.
What do we make of this week? First of all, last week I told you I thought what was going one way at the beginning could be going the other way by the end. That turned out to be half right as the banks never made it through resistance. This could be the week banks block the advance of technology. We could also see a serious attempt or series of attempts for the Greenback to bounce. Oddly enough I do think there still is room for tech to go slightly higher, as far as 2150 in the NDX but we are in a position where the NDX has made new highs above April but it hasn’t been confirmed by anything else. If things continue this as they did last week, the tug of war between tech bulls and bank bears will unfortunately be won by the bank bears. I think it could be a very choppy week. One other thing, keep it in the back of your mind we are moving into week 158 off the Dow 2007 top.
Let’s go over this chart. You can easily see the BKX did not participate in the recent rally and looks nothing like the NDX chart. Now it has violated the near term median channel. That’s not good. However, in the lower portion of the chart you see a parallel warning line. There’s a reason they call it a warning line. In pitchfork methodology, the point of no return generally is the parallel warning line. We came to that point a few days back on the last failed bounce attempt in the Dollar. It went on to set new lows. Since the stakes and channel is higher and wider on the BKX, if for any reason the parallel warning line is violated with a close below the line, the equity markets could be in serious trouble. For now, bells and whistles should be going off as the warning signs are there.
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.