Current market psychology perplexes, offers clues

Since the President’s Day turn, market psychology has been as interesting and complex as I’ve seen in years. It’s also important to put one’s mind around it given the twists and turns we’ve experienced in the past 2 weeks. As you know by now, markets dropped on fear based on the initial news coming out of Libya. But a few days later it appeared that markets turned back up when someone floated a rumor that Gaddaffi was shot.

Let’s separate the geopolitical situation from market psychology. At the point in time the rumor was floated it made no difference whether it was true or not. The bottom line was everyone felt relief when they heard that rumor. Buyers quickly came into the market, lifting prices all the way back up to the gap area from the President’s Day sequence. So what’s wrong with that? The problem was that sellers panicked and then buyers panicked. The normal orderly flow of the market is when markets top on good news and bottom when sentiment gets thick. For most of the past 2 weeks, we’ve seen the polar opposite of that. I told you that last week and markets have gone on a roller coaster. That’s why they are on a roller coaster. There was bad day earlier in the week which can be attributed to the gloomy mood surrounding that insider trading scandal.

Finally, on Thursday, traders did the right thing. They bought into the gloominess and also bought the rumor of a better jobs number. The jobs number did turn out to be the best one we’ve seen in a long time and then traders did the next right thing. They sold into it. That gives me reason to believe we could be coming out of this strange sequence this week.

Then another strange thing happened. Friday looked like it could be a big rout for the bears but they lost control late in the day and markets recovered into the close. Now consider nothing has really changed in Libya (he’s still there) but people were willing to buy and take positions into the weekend. That’s not euphoria, that’s likely smart money having confidence to play the stronger hand. I’m thinking it might be the same people who bought into Tuesday’s gloomy weather.

We may come out of this mess with a split market because it looks like the semiconductors are trying to go sideways in a triangle type formation while the BKX is barely holding on to important support levels. The BKX hasn’t slipped on the banana peel yet but it’s really close. The SOX appears on much firmer ground. The challenge for tech at this point is to get through the gap we’ve discussed since President’s Day. The place for sellers to take control of this market is right there. They made an attempt to take control on Friday but didn’t have the follow through or staying power. The bulls are very close to taking control of the market again and going higher. There’s still a lot of doubt out there as to whether markets can go higher and it’s simply a manifestation of the fact they’ve been going up for 2 straight years.

All of which brings me to the next point. We are now at the 2 year anniversary mark of this bull. In terms of Gann we are looking at a 720dg move in terms of time. That’s why anniversary dates are so important. Markets move in terms of geometry and the earth’s orbit around the sun. Since we’ve seen the bottom, the earth has had 2 revolutions. What does that mean to us? If institutions want to dump stocks, this is an excellent point in time for it. In fact, between this week and the March 21st Gann Master Timing Date is the most important time of the year for a trend change. If markets don’t make a major turn this month, they aren’t turning.

It’s not too soon to start thinking about the long term aspirations of the US Dollar again. It missed a major window of opportunity to turn up last week and has another one this week. Now we enter the 89/90 trading day window off the November low. But this is not my big concern. My concern is the fact the Dollar squares out at 121 months in July. That’s 121 months off the 121 high at the top. Nothing is set in stone but if the Dollar is sinking into July, it might actually create the kind of conditions that could end this long bear market. Here’s another scenario that on the surface seems favorable but in the big picture more dangerous. This is March, along with its Master Timing Date. Let’s say that on March 21st the Dollar stages another bear market rally that lasts 4 months and peaks around the end of July. Do you see where I’m going with this? Yes, the potential would be there for an inversion of the cycle where month 121 creates a high instead of a low which would open the door to yet another big selling wave. Taking this logic one step further, the Greenback would have wasted its best cyclical opportunity to end this long bear market. If that were to happen, I’d start getting concerned about a serious case of hyperinflation. No worries yet, I don’t alarm anybody because this scenario hasn’t happened and may never happen. I just want you to come into the sequence with your eyes open.

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