Okay, so I prepped you for the worst case scenario. We had a market that dropped on fear and dropped even more on the big one. We also know it rallied on relief and last week it rallied on the relief of the G7 intervention. That’s the psychological side of things. The intervention is working because for once their timing is impeccable. The G7 acted just as the Spring Equinox hit and it is the single most important time of the year for a change in trend. I don’t think they did it on purpose because it was Japan’s as well as the world’s misfortune that the earthquake and tsunami hit just days leading up to the spring change of season.
Sometimes it’s better to be lucky than good. Japan is hardly lucky but I suppose if something like this had to happen, it materialized at a time where an intervention did have a chance. Why am I spending so much time on this intervention business? I’m no currency expert but I don’t think the markets like seeing any major currency getting too far out of whack and the Yen was threatening to do just that. But even though the Yen backed off, it still didn’t get the Greenback going in a new direction. For that we still needed help from the Euro.
We track the EUR-USD as a regular part of our Short Term Update service and I’ve been commenting that the underlying technical picture suggesting prices were going to continue moving higher until such time that they hit the top of the pitchfork channel which commenced back in January. On Tuesday prices finally hit the top the channel on a decent Gann level. I said that conditions were ripe for a turn and on Wednesday there would likely be new headlines and I had no idea what those headlines would be. As it turns out, we were greeted on Wednesday to news of financial distress in Portugal. What’s the lesson here? When we hit an important channel line not only does it have the capacity to change the direction of the pattern, it also changes the sentiment of the crowd. Prices on the EUR-USD have been lower ever since.
All of which takes us to median channel behavior change number 2. We’ve tracked for you the new inverse relationship between the bond market and equities with great success the past month. If you’ve been following our work you know the long bond has been in a bearish channel of its own. But when did the bond market break out of the bearish channel? It closed outside the channel on either February 17 or 18 give or take a few ticks. When did the market top? Well, the NDX topped on February 16 and the SPX topped on February 18. To me, that’s what has been driving the bus more than anything. The pattern breached the channel line and the stock market topped. How’s that for new behavior?
But I also told you last week the bond market hit 144 trading days off its top and for now that window is a bulls-eye. Subscribers during the week were told the bond pattern was favorably disposed to the equity market because the probability was very good it would retreat and test support underneath that market. As of this writing, it was doing exactly that. It has been looking better for equities but on Sunday night it looked like the bond market finally hit a good Gann reading and may have found a level of support. In the very least it should make for an interesting bounce attempt. What that means to the stock market is we’ll likely see some rocky periods this week. The bond market looks like it bottomed for now so my ongoing approach is we’ll continue to see alternating periods of bullish and bearish activity.
I’m also starting to get concerned about the sentiment in the equity market. Last week we heard for the first time a new term. The Dow is now called the ‘Teflon Dow.’ If you read between the lines this is a level of complacency and arrogance not earned given the market was down for the better part of a month and we once again came to grips with a nuclear disaster. Is that all it takes, a 5 day rally to turn sentiment to such a degree? The last time I heard references to Teflon was for the Teflon Don himself, John Gotti. How did that work out for him?
Thus far it’s been a rally led by technology as the SOX has broken through first resistance and the biotech BTK had better relative strength throughout the selling. It’s done well of late and I don’t see why that shouldn’t continue. What I am concerned about is housing and banking. These 2 areas have lagged since markets started bouncing. I don’t think its terminal because you’ll remember these areas were not leading on the way down. As long as a bear move is not being led by housing or banking I don’t think the market can get into serious trouble. As a matter of fact, I think sentiment is much better there. Why? Last week CNBC reported that new home sales hit a new all-time low. According to Diana Olick, new home sales dropped 17% in February after a big drop in January. That’s actually good news.
Come again. Yes its good news. The reason its good news because sentiment for the sector is just about as lousy as it gets. Folks, we are not economists or real agents. We are here to dissect market psychology. The fact is that banking and housing stocks are not setting the world on fire, but they aren’t leading a new market either. The bad sentiment we are getting in this sector is due to the fact that housing topped last April when the rest of the market made new highs in the post September sequence. I view the stock market as the single best economic indicator out there. It’s true that housing and banking didn’t confirm the new highs and it also can take six months to a year for whatever it materializing on the chart to be felt on Main Street. Thus the stock market is greeted with this lousy sentiment. Unfortunately, we don’t have lousy sentiment across the board because the rest of the market is in Teflon mode. It’s a complex market with lots of cross currents. But I am encouraged by the lousy sentiment in housing.
So where does that leave us? It’s a post Spring Equinox market and there are several factors to watch. Most important is the bond market. I expect some sort of a bounce this week and that should back off equities. We’ll also get the test of the Dollar against the Yen as well as the Euro. I don’t necessarily think a good Greenback spells curtains for equities anymore but an improved U.S. dollar should act to neutralize stocks. The Dollar has a good chance of making ground against both Europe and Japan. I’m anticipating a turbulent week for equities.
As you can see, we’ve been on top of these markets and in many cases have given you an important scoop when it comes to intermarket relationships. This is a weekly column and if you want information on a timelier basis you should get a subscription to our Short Term Update. It’s available at www.lucaswaveinternational.com.
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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.