Market leaders are sitting at the opposite ends of the spectrum. On the one hand we have Apple Computer sitting near cycle if not all time highs. On the other hand we have the banks and housing sitting not too far from the July lows. Why shouldn’t this be the case? When told by sportswriters he made more money than President Hoover, Babe Ruth commented, "I had a better year than he did."
There’s a real concern again with these banks. They have barely participated since July. The only reason markets haven’t collapsed in September and October is simply because banks haven’t tanked themselves. Now they seem to be stuck in congestion zones and markets are holding because of that. Last week it was the Wall Street banks who were the culprits. Regionals, diversifieds and consumer names held their own. But one has to wonder how long the rest of the market can stay up without confirmation from the banks.
I have an idea. I don’t have a crystal ball but I do have a bunch of hypotheses. Next week we will be in the epicenter of the next and last time window for the year. On December 7-8 we’ll be at the 161.8 week marker off the NASDAQ top in 2007. The last marker we came to about a week and a half ago was the 161.8 marker for the Dow/SPX pivot. You’ll remember that day, it was the day news came out that Ireland was rescued. But these crises don’t seem to want to go away and I’m of the opinion we’ll get at least one more scare/close call/bailout attempt. Will it be Spain, Portugal or some other country not yet on the public radar? When we are so close to such important time windows we must take this kind of news very seriously and not with the usual grain of salt.
I think there is a great chance we’ll reach a peak in fear sentiment with the next European pound of flesh over the next week to 10 days. I’m always concerned about something that is the greater probability but doesn’t happen. I was down with the idea that markets could have a good day after Turkey Day. After all, from 1950-2000, the Dow was up 42 out of the 50 years for the combination of the day before and after. If you had to predict what would happen in a 3 hour trading window wouldn’t you go with the higher probability? The day after is statistically the most bullish day of the year. Honestly, I was more concerned for this coming week than I was for last Friday. Then Friday turned out to be a clunker. Now all we have is this week. When the higher probability doesn’t work out it is a red flag.
What we have now is a Greenback that is suddenly on fire. What happened to all that talk about inflation going through the roof? What happened to all time highs in Cotton? What happened to the limit up talk in Corn? Did anyone notice that Cotton has come straight down in one of Andrew’s classic action-reaction sequences? Last week I actually saw a report that suggested a 99 cent candy bar will one day cost 11 bucks. Chocolate as expensive as caviar? Believe me; it deserves to be because it tastes much better. But when you see and hear these kinds of reports on television we have to think of it as a contrary indicator.
The technical picture is a mixed bag. The Dollar has calculations that potentially can end the rally. Certainly its positioning with the median channels suggests it’s at the high end of the move right here. However, in every new pattern there comes a point where resistance is shattered. In our technical world we don’t only look at things like former highs or polarity points although those are very important. We are also looking at elements like time windows and retracements, but also price and time ratios and dynamic Gann square of 9 levels. The Dollar has a couple of those key elements in place in addition to the pitchfork resistance. By late Sunday night those relationships were in danger of being violated.
The Dollar doesn’t trade in a vacuum. I want to see some commodity based charts which trade inverse to the Greenback show equivalent relationships only going in the opposite direction. The two I cover over the weekend are Copper and the Aussie Dollar. Neither one of them show the kind of relationships we have on the Dollar as we enter the new week. Neither does the EUR-USD although the key level there is 1.3110. If the EUR-USD holds that level chances are the Dollar isn’t going through resistance right now. On Sunday night, the EUR-USD was still a handful of pips away. Putting all of this together the highest probability is the Greenback can change direction here but is not likely to have an absolute reversal that ends the rally. But if the Euro keeps falling the Dollar is going to break through resistance and then the cat is out of the bag. A Dollar breakthrough can even mean the Euro tests the lows from earlier this year. I’m taking into consideration the fact prices have moved over 1.40 just a short time ago. But since we are in the time window it is possible to get big moves in a short period of time.
Once again we are in a position where currencies can take center stage. The butterfly effect is such that what happens on the Euro will impact the Dollar which will impact the commodity trade and ultimately the equity market. The only influence the equity market is going to have is the fact the bigger time cycles expire in about 10 days. So whatever is going to happen in the news, this is the time for it. After that we’ll be within 2 weeks of Christmas and we are likely to end up with our Santa Claus rally. So the theme for this week is we are very vulnerable to external events. Not so much because of the events themselves but because patterns are at key points on the charts. The fundamental crowd doesn’t know it or understand it but this is when important events happen. Those of you who have been following my work for years know that when important time windows come due, the news events just seem to manifest. We never know exactly what will happen, but something always does. Because we are dealing with the Euro and the Dollar, at least this time we have a clue.
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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.