S&Ps approach third rail

I suppose we got the day off we didn’t get for New Years. If you were wondering why we didn’t get a three-day weekend for New Years is there is a rule that states markets have to be open to close out the accounting period if the end of the month is on a Friday. I love the markets but as intense as it is I always enjoy these three-day weekends. But these periods always give me a chance to reflect on where we are and where we are going.

Last week we talked about the fact the NDX set a new high above 2007. What that did technically is put us in a position where the NDX is up continuously for the past 8 years. I don’t know if you want to call it a secular bull because we won’t know for certain until certain technical factors appear. We’ll discuss one down the page. We had a 5 year bull interrupted by a cyclical bear from 2007-08. The NDX topped on Oct. 31, 2007 and bottomed on Nov. 21, 2008. Really, that’s all it was. Seems like a lot worse, doesn’t it? Then we consider the rest of the market with the original top on July 13, 2007 in the Russell and the final bottom in March 2009. People need to realize it’s a process more than a line in the sand.

But I was quoted in the January issue of this magazine that we should have choppy markets for several months but any major move would be to the upside. That may be in the January issue but I said it over four weeks ago. So far they’ve been more up than sideways and we still have good internal strength. The latest violation came last where the banks traced out a 54.23 high in exactly 5.428 weeks. The week ended higher and since it was the banks you have to conclude that nothing bad happens to financial markets when banks go higher. As it turns out, the violation of the latest sequence is also a violation of the 89-90 day sequence off the late August low for the BKX. It finally has a lane to go higher.

I’ve heard some analyst suggest markets HAVE TO correct because they haven’t. Let’s understand something here. Markets don’t have to do anything. They’ll react to our sentiment. If we’ve reached a point where Aunt Harriet and Uncle Bill are buying when they don’t know the first thing about markets, then we have a problem. But I don’t think this market has captured the imagination of the public yet. This is one of the least respected legs I can ever remember. People SHOULD doubt this market after what happened in 2008 but as long as it continues to be doubted, it will keep going higher. But once everyone comes to the opinion that it only has one way to go, that will be it. Do you honestly think we are there yet?

Something happened last week which is adding some more fuel to the fire for this market run. Last week at this time I was looking for at least a suspension of the move in food inflation led by corn. It traced out an excellent price and time peak off the 2008 top but even that was violated. It was an important violation because the initial high on Jan. 3rd hit at 634 on 635 trading days off the 2008 top. That led to a five-day pullback which may not seem like much but it was the biggest correction since the drop in November. But even that was taken out and you have to conclude is this all we get from this quality of symmetry? Then the dollar had a horrible week and has gone as far as it can without violating the possibility of the pattern off November continuing. What is even stranger is the fact that by Friday, the Greenback and Gold were going in the same direction, down.

So let’s talk about Gold. Last week I told you it was in its most vulnerable position since this long bull market began. While the Gann calculation in corn took less than three years to develop, the one in Gold has taken 30 years to develop. In what we are calling the “Gann Bomb,” the price and time square in Gold was felt severely on Friday and most particularly in mining stocks. If you want to learn more about this, sign up for the discussion I’ll have with Dan Collins in New York at the Marriott Marquis on Feb. 21.

http://www.moneyshow.com/tradeshow/new_york/traders_Expo/workshop_details.asp?wid=737FDAA2785D43AAB8A1BA988530DDCC&scode=021493

Once again, Gold has gone as far as it can go without actually violating support and confirming a bigger correction but the XAU already is confirming. We have targets now on the XAU dropping all the way to 186. In the bigger picture that doesn’t seem like a lot but off the high that would be a move of 19.8%. That is worthy of an intermediate term correction.

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