Stock market numbers are key to overall pattern

So why did the markets turn higher yet again? I have a hypothesis about that. Certainly the geometric calculations were in place to get a bigger move yet all we got was a shake of the trees. People look strictly at the numbers and think they’ll totally dictate the action. The numbers are merely a tool to help us interpret the pattern and see what is going on underneath the surface. The pattern is always king. That’s what are methodology is called pattern recognition.

It is but one tool (numbers) that we use. What we can’t anticipate is how sentiment will play out at any given time. Sentiment is another vitally important piece of the puzzle.
A week ago Friday was a day key calculations fired off. That was also the day the Egypt situation accelerated as a world news event. That was the day the crowd started taking this stuff seriously. While markets dropped, commentators of all kinds expressed concern the Suez Canal could be cut off which would send oil tankers down around the Cape of Good Hope in South Africa. Another concern was the potential for an Islamic takeover that could rip up the peace treaty with Israel. Any or all of the above would turn the clock back decades. All of these fears are noteworthy and valid concerns. At some point they may very well come to pass. The problem, as I see it, is this kind of sentiment doesn’t bode well for the bearish case.

As perverse as this sounds, when it comes to financial markets its all about the fear and greed. When does a correction end? Is it when markets hit a certain retracement? Is it when they hit 5%, 10% or even greater? We are told that a correction that hits 20% is a bear market. What is the correct answer? When does a correction rightly end?

None of the above. The correct answer is a correction ends when sentiment gets to an extreme. That could take 100 days, 1000 days or a single day. When the run of the mill correction starts it usually lasts until sentiment gets thick with worry or fear that the sky is falling to one degree or another. Think about this for a minute. A week ago Friday fear ratcheted to the point where we contemplated the sky is falling worst nightmare scenario. Oil and war. That’s terrible for society and politicians. But for the stock market, that’s what savvy traders call ‘blood in the streets.’

So it’s very important to separate what is going on in the news to what is materializing on the chart. Of course, we could have had more fear and another few down days. We might have had those few extra days but this shake of the trees didn’t start from a place of euphoria. As far as sentiment goes, we had the minimum requirement for being scared out of our boots. But as far as the Middle East goes, this is a fluid situation and no doubt will be an important story this year.

Gold finally got off the floor with a set of decent calculations. What finally turned this group is the fact the XAU had a first leg down of 16.36. When you multiply that by 2.33 you get 38.11 and then subtract that from the high and you get 194.61 or just a penny off the low. So we had an interesting 2.33 Fibonacci extension to turn the market back up. For those of you keeping score at home, that turn came before the public took serious notice of the events in Egypt. Even if those of you who think news events dictate the action, this calculation is too perfect to think like that. Right now the XAU is hitting turbulence of overhead resistance in a zone from 209 to 216. There is also the potential of another Gann cycle kicking in later this week. While the reaction has been decent, in no shape or form has a bottom been confirmed.

Also noteworthy this week was the end of the six-week long consolidation in the long bond. It did its job, helping people to forget prices were already off about 11% from its high. Prices went sideways until they hit the outer reaches of the pitchfork. By the way, did you catch my Gann article in the new February issue of this magazine? I’m going to do an article on pitchforks which is scheduled for June. You’ll never get a better example of the power of the pitch than this long bond sequence. Don’t look now but the bond market has started a fresh leg down. I like to follow the price but interest rates will be heading higher no matter what the Fed tells you. They might control the very short end of the curve but market forces control the opinions of the middle to longer end. This will be another developing story for the year.

Finally, we have the equity market itself. Banks have held the calculation we discussed last week which is a concern. While the SOX did not there are a bunch of other calculations to be concerned about. It’s now on the back end of the 261 week window to the 2006 top but just as importantly, it is running into long term overhead resistance which is almost certainly going to create the kind of turbulence that could stall the best of rallies. I’m not going to tell you it can’t get through, but the higher probability is the pattern stalls out soon. It could do so as early as the end of the week when several time relationships come due.

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