Have you taken a good look at the hourly chart of the Nasdaq E-mini lately? Doesn’t it look like a cardiogram? It has basically spent a full week, since last Monday; testing a polarity line roughly the equivalent of the prior highs set the last week of March. There are several reasons for it but mostly it’s because the different tech sectors are all over the map. On the one hand we have charts like the semiconductors looking to go higher, biotech stocks that are hitting big resistance and others like BBBY and EXPE that are breaking through. The tech index is no longer pure technology.
On the other hand we have the inverse relationship between equities and the bond market. For the most part, that relationship held form last week as the long bond broke down and we had indices like the Dow and Russell 2000 at new highs. In the case of the Russell, this new high is above 2007. What does that mean? Well, we now have yet another chart making an important new high. I have to be honest with you; I still get angry emails from perma bears taking me to task about talk of a bull market. This time I’ve been taken to task again by someone questioning my sanity and assuring me the market will be below the March 2009 bottom at some future point. I do live by what radio guys call the 1 in 100 rule. That means if one person has the nerve to write in and express the opinion, there are at least another hundred people who think it. I’ve been building the case for the bull and why not? It’s been up over 2 years. There have been numerous opportunities for the bears to take it down. The latest and best opportunity happened with last month’s unfortunate tragedy in Japan. But the quake and ensuing Nikkei crash brought sentiment to extreme. You don’t need to look at Investor Intelligence reports to see that the possibility of a nuclear meltdown brought back the kind of emotions we felt in 2008. Ever since that point, markets have been higher.
While we are on the subject of sentiment reports, it was reported last week that bearish sentiment among investment advisors did drop roughly 30% all the way down to about 15% bears. There are lots of people out there who think the stock market is going higher which is now a problem. But there are several factors to consider. Yes, bullish sentiment appears to be at extreme. But just because it’s at extreme does it mean we are going to have a leg that takes the stock market to lows below that of 2009. Here’s what bears fail to understand. Sentiment works differently in bull markets than in bear markets. Think about the top in 2007. At first we recognized a real estate slowdown was materializing. After July 2007 real estate, title and escrow agents realized that deals were closing at a much slower clip if they were closing at all. But sentiment was such that the economic slowdown would end up with a net result of a ‘soft landing.’ Honestly, who ever heard of a soft landing? We were told by people no less than Helicopter Ben that the subprime mess would be contained. Do you remember THAT? It took a whole year, all the way to the summer of 2008 for lawmakers to take the Fed chief to task. I remember the BKX was falling precipitously when big Ben was taken to task by the Senate Banking Committee on the day the BKX bottomed. You’ll remember we had some very interesting Fibonacci calculations firing off that week. It was the same day the SEC announced a freeze and naked shorting of banking stocks. The banks did rally for the next 10 weeks but as we now know, it was Custer’s Last Stand.
But in bull markets, for whatever reason, fear builds very quickly. In fact it took 4 weeks for people to freak out over the nuclear reactor. For those of you who tell me they should be freaking out, I have to remind you that since that point, the Nikkei has been in rebound mode and it’s been that day despite the fact of reports of radiation spreading into the soil and further from the site. The Japanese stock market goes up even as the news doesn’t get better. Do you think it might have something to do with the fact the Nikkei bottomed in the 233 day off the April high of a year ago and the G7 intervention taking place on the weekend of the Gann Master Timing Window?
But while sentiment among advisors is strong, news events remain bad. We struggled through a week where the Federal government threatened to shut down. Who knows, maybe the markets like that. But those are kind of worries that allow a bull to climb a wall of worry and it was just the prior week where we had to deal with housing starts hitting new all-time lows. No matter how bullish investment advisors are getting, headlines reflect lots of worry going forward. No wonder the NQ resembles a cardiogram.
So now sentiment swings back to the other extreme and we find the SPX outside of its long term bearish channel. I have news for you. The Russell 2000 has been out of its long term bear channel since December. I don’t follow it too much simply because I’m trying to get a proxy for the entire market at large but perma bears have to consider one key point. In new bull markets, the most important leader is the small cap world. You don’t want to see the same stocks that led last time leading again. For a bull market to sustain, new technology, new companies, simply put new blood has to lead higher. It is happening. I’ll be the first to admit there is a problem with the bullish sentiment but as long as the SPX doesn’t revert back to the path of least resistance down as expressed by the longer term SPX median channel; the future of the stock market looks good.
But I come to you this week with two issues. First of all, we have the BKX (Banking sector index). Last week the BKX (See chart below) came close to the higher end of the intermediate level downward sloping median channel. If the BKX were to break out of this channel it could be very bullish for the market. If not the overall market could fall into retreat.
But there is another issue that concerns me and we haven’t talked about it in some time. Last week the intraday pattern on the Greenback was as bad as I can ever remember it. It reminded me of a couple more famous conditions from a decade ago. The last time I saw such an ugly pattern I found myself looking at charts like WorldCom and Enron. Before I alarm anyone, there is one major distinction. Those ugly patterns were early stage bear on a daily chart. This ugly pattern is late stage bear on an hourly chart. The outcome thus far has been similar. Since I wrote about it in my Tuesday night Short Term Update the pattern broke down. Those of you who read my February Gann article in this magazine should realize we are now 118 months into a bear market of a pattern that topped at 121 and is 3 months away from squaring out at 121.
We’ve always been concerned with the quarter lines on this monthly chart. You can clearly see the price action ended the week on a cluster of 2 of them. We can ill afford a breakdown here and if we do break down it can open a Pandora’s Box that can ultimately put the Dollar in a free fall. We know the equity market has enjoyed an inverse relationship with the Greenback. What I wonder is at what point does that inverse relationship equities has with the bond market change to a new relationship with the Dollar where they both fall together?
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.