Two key events materialized last week that had to be related. As you know we’ve been watching SPX 1325 very closely. Hosni Mubarak and what is coming to be known as the Egyptian revolution also came to the end of phase one. Make no mistake, we may have hit a culmination point but it’s only the end of the beginning.
First, I’ve noticed that when markets get close to important intermediate or long term channel lines important news events tend to develop. This time was no exception. Perhaps because we are testing a long term median line we had some history enter the mix.
History didn’t shortchange us either. This one has the potential to be a serious game changer. But along with the event comes some of the most complex reactions I’ve seen to any event in a long time. Here at Lucas Wave we are not concerned with news events as we are the reaction to them.
Last week was experienced with alternating sentiment. One day we get fear and the next complacency. It was Thursday when news broke that Mubarak was stepping down. The media said that traders were solely focused on food inflation. That wasn’t exactly the kind of fear of 2 Friday’s ago.
Now the event has happened.
Actually, we were not rooting for fear or anyone to get hurt. I was certainly outraged to see what happened to our journalists who got caught in the crosshairs. But as a trader one must do the tough job of separating emotions about an important event and translating it to what it means to the market.
As perverse as this sounds, when markets do climb a wall of worry they have a better chance of going higher. I think the pullback 2 weeks ago lasted only one day because fear levels that the end of the world was coming materialized very fast. That day is still fresh in my mind. Perhaps the market has developed a case of amnesia.
Now we have almost the polar opposite reaction. How could this be? 2 weeks ago we feared a regime change would lead to the closing of the Suez Canal and turning the clock back on the Israeli peace treaty signed all those years ago with Anwar Sadat at the helm. Now we finally have that regime change as Mubarak steps down. But the reaction was one of extreme happiness. Here’s what I heard as the key words to describe Friday’s historic moment in history. JUBILANT PANDEMONIUM breaks out in the streets. Goodness, there’s real EUPHORIA out there. Suddenly, its not Tehran 1978, but peace has broken out in the region. It has? As I said, this is only the end of the beginning.
You’d expect the people on the streets of Cairo to be happy. But why would the market go up when 2 weeks ago it went down?
My point is that this is widely viewed now as a GOOD NEWS EVENT. I’ll agree, it is good news. We don’t know who will be in charge in a few months, let alone next week. We have no idea what will happen. But if you read Socionomics (I trust many of you have), it was stated there that peace broke out between the Israelis and Palestinians at Bill Clinton’s White House during a raging bull market. Peace is supposed to break out when markets are rallying. It’s a sign of a rising social mood. But you can now also make the case they are no longer climbing a wall of worry.
Friday was the first time I heard the term ‘euphoria’ used on CNBC in a LONG TIME. I even remember who uttered it. It was Bill Griffeth on The Closing Bell. I would come here and tell you it’s a top but this one is more complicated than that. On the one hand, we do have euphoria but on the other hand we are still worried about what comes next in Egypt. Can euphoria and worry co-exist side by side? In the short term it probably can. I don’t think we can get more euphoric than this. It’s quite an event, hard to top. It’s a Berlin Wall type of event.
But euphoria is a fleeting emotion, that’s why markets top on them. The underlying emotion that causes buying is hard to sustain.
I wouldn’t be as concerned but all of this is happening as the SPX pierces through the long term bear median channel. On Friday it sliced through. That doesn’t mean too much yet. In our pitchfork work we see patterns slice through channel lines all the time. The issue is not that this market had what was needed to get through the door. The question is whether this market has what it takes to stay at these levels. Tests as important as this one is should be a process and not a one day affair. But I will tell you this. Coming into Friday I told my client base on Thursday night the technical situation looked more bullish than bearish and since the trend is your friend it still gets the benefit of the doubt. It will continue to get the benefit of the doubt until we see evidence to the contrary. While history can’t get more euphoric, it is possible for markets to do so. But that doesn’t have to be now.
A turn can come at any time simply because we are now at the resistance target, sentiment has fired off in an extreme fashion and markets are extended. That being said banks and housing still look okay. The bottom line here is as long as banks and housing don’t want to drop, nothing really bad will happen to the market. I first told you that about 15 months ago. At this stage of the game the sector of the market which is most vulnerable is the SOX. What that means is if markets elect to pullback here the higher probability will be for it to be led by technology and perhaps not be confirmed by housing and banking.
The other condition I’ll be watching is whether the SPX will be able to stay above 1325. The longer it stays up there, the greater the chance it has of going higher. If you look at pitchfork methodology as following the path of least resistance, you’ll see that as far as the SPX is concerned, getting away for the bear influence puts in squarely in the upper portion of a bull channel. When we think of these kinds of patterns we find it barely believable that markets can go higher. Let’s not put pressure on ourselves. Let’s pretend we are looking at an hourly chart. If the pattern you are looking were an hourly chart and it pierced through a bear zone you would think that prices can go much higher. Putting it on a weekly or monthly time frame does play with the mind. It doesn’t matter what time frame it is, patterns will do what they will do.
But because sentiment is so complicated, we could see a trading range develop up here as bulls and bears compete in a tug of war with alternating feelings about the geopolitical event. The key event this week is the SOX. It’s most vulnerable to a top and turn in the first half of the week.
This is the final call for our breakout session next Monday at the Traders Expo
I’m going to cover a very precise way to catch important market turns in indices, stocks, Forex and Futures markets. My understanding is the weather is going to be good. It’s President’s Day, markets will be closed and you should have the day off from work. Since you probably won’t be snowed in, I hope to see you there. Since I’ll be on the road, next week will be a shortened column. My regular column will resume when I get back in 2 weeks.
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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.