The theme of last week was divergence. Relationships that we’ve seen hold water for months if not years have stretched the rubber band, almost to the breaking point. We have an important change developing in gold and the Greenback. You could’ve set the inverse relationship between the precious and the US Dollar to your Bulova, it was that precise. Within the metals themselves, we’ve seen a divergence between Copper and Palladium. But perhaps no where was it more prevalent than on Friday with the SOX/BTK and the BKX.
Finally, it was the NDX that did not confirm a new high in the Dow. What that means is a correction has started. What that means is I have some good news and some bad news.
I know, I prefer bad news first as well. If you are following inflation, one would think the best hedge against it is the precious metals. Well, that’s not working right now. So if gold is not working, that must mean deflation is waking up. With a lower Dollar, we don’t have deflation working either. I know that Corn is still through the roof and we have a CRB at relative new highs. But Copper is not confirming.
So if the Dollar is dropping and the Gold charts getting absolutely creamed, something isn’t adding up. I get concerned anytime I see something new develop. Everything you’ll see in the headlines later this year as economic fact first materialized on a chart. So by the time the media and economic think tanks get around to it, the new direction will entrenched. So let’s talk about it while it’s in the infancy stage. The fact that Gold and the Greenback are going the same direction means one of two things. Either the US Dollar or the precious metals are in a larger degree sideways pattern and it just so happens they are both going the same way for a short spell; or the Dollar is trying to tell us something really serious. The fact of the matter is the Dollar never gave us even a truncated C wave up in its move off the November low. It appears we are headed for a retest of that low and now the best case scenario is a larger degree trading range above the November low and below the December high. Right now the 38% retracement, 3rd rail of deflation up at the 90 handle is light years away. More likely is a breakdown that could take us to a climax this summer as the chart squares out at 121 months off the 121 bull market top from a decade ago. If that were to happen, we could end up with a test of the bottom of the long term pitchfork channel I’ve shown you from time to time. We are not in danger of that yet, but prices right now are in the process of a major failure at the long term median line.
We’ve discussed in this space last year what would happen if the Dollar were to breakdown. This time, I think we would be looking more to hyperinflation than inflation. Think about it, this is a feast or famine type of market. It does not appear to give us middle ground. Truly the best thing that could happen is the Greenback holding the lows as the economy continues to recover. We certainly do not need any new crisis to worry about. I don’t think the Fed can handle it. One thing is for sure, the Dollar will square out this year just like the Gold market did earlier this month.
Getting back to the stock market, the reason tech is pulling back is because the 2 most important components of technology hit key points in their development. The SOX hit an important intermediate term time window off the 2006 high and the BTK hit an important Gann square of 9 level off its 2002 bottom. There is every chance we can now have a repeat of what happened last January. You’ll remember that tech pulled back while the BKX stayed even. What I told you at that time was as long as the banks didn’t participate to the downside, the market would eventually recover. At that time, most people were looking for a return to the bad old days of 2008. While we did suffer a serious shake of the trees into the middle of the year, markets recovered as some important Gann levels fired off in August, one of which we will discuss in February at the New York Traders Expo in my price and time breakout session. Here’s the link: http://www.moneyshow.com/tradeshow/new_york/traders_Expo/workshop_details.asp?wid=737FDAA2785D43AAB8A1BA988530DDCC&scode=021493
What is most interesting about last week is the fact banks started to participate in the move off the high but held the line on Friday. They literally HELD THE LINE. It is the banks holding the line which gives one hope we are not going to see the worst case scenario in the Greenback. IF the currency goes over the cliff I don’t see how it would be possible for banks stocks to go higher. But sometimes storms start slowly and develop into monsters. A hurricane was once a tropical depression. But you can usually tell if conditions for the perfect storm are setting up. We have a couple of elements in place but an incomplete picture. I’ll tell you the same thing I did 12 months ago. Nothing seriously bad happens to this market unless banks are leading to the downside.
There’s one other problem we haven’t discussed. It’s the bond market which has consolidated sideways for a whole month. At this stage of the game, the longer it consolidates, the greater the opportunity it’s going to have to drop in price and it should test the far end of a downward sloping pitchfork line in exactly a week. That brings up the state visit of the Chinese last week. Sentiment was interesting to say the least as our media and Congress maintained a high level of hostility pointed at the Chinese President. It seems we are having a hard time understanding our new role as debtor to the developing new superpower of the world. We have a society open to debate, that’s where our strength as a democracy comes from. However, when we don’t show a united front to our largest competitor that can’t be viewed as a good thing. The way it looks to me right now, if the Chinese or the Treasury doesn’t start buying our bonds pretty soon that is another component that will add to the storm.
With the divergences the way they are, we could be all over the map this week.
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.