Stock traders face pivotal week for markets

We could very well be coming to the most pivotal week of the first half of the year. The week starts with an equity time window and ends with one for the Greenback. Sandwiched between these 2 seemingly invisible events is the big Fed meeting. Our audience at the New York Traders Expo wondered if the Fed really follows these windows as it always seems an important Fed meeting is within a day of these naturally occurring events. I don’t know but it certainly makes for interesting debate. That being said, we started the week with a report from Standard and Poor’s that downgraded its outlook on US debt. Since they didn’t change the rating, I’m not exactly what that means. It could be a bunch of posturing and a warning shot to politicians who suddenly think playing Russian roulette with the debt ceiling is good sport. From a psychological standpoint the market agreed, using the report as an opportunity to sell off. But by Wednesday it was all shrugged off which meant that for the time being politicians got off with a slap on the wrist.

As far as our work is concerned, it appeared the week could be a long one and prices could be making an inversion low in the time window. It didn’t turn out that way as markets recovered and it’s very possible we could get a high instead. On the budget battles, I don’t think any reasonable person believes politicians would let the United State government default and if you’ve been following my study of the Panic of 1907 you should realize by now that if the US ever does default, it will be because they really can’t pay the bill.

Our next area of concern which we discussed last week is the Greenback itself. This was the week it actually violated those quarter lines on the long term median channel. But in a twist of logic the rest of the week was spent dealing with the bigger picture which is the market approved of the lower Dollar simply because it believes it’s still good policy to inflate its way out of the debt. That’s why the bond market was neutral to up, equities were up and the Dollar was down. But as we hit the big time window of 610 td off the November 21, 2008 turn which by the way is a 21 year cycle point tied directly into the 1987 crash leg we have some areas to worry about.

The first is China which has been humming along very nicely in its median channel climbing an inflation wall of worry. But the bottom materialized after a drop of 526 points in 52 days. Well, another 52 days has passed and we have an evening star on the chart. It’s a good one. I’d say on a scale of 1-10 it’s an 8. It has the resistance too, not on the price action but on the pitchfork channel. So if China reverses, that could kill off the reflation/risk/commodity trade or whatever they call it. When China goes down, the Dollar generally rallies and when the Greenback rallies the stock market generally does not. The fact this is hitting RIGHT NOW really concerns me.

The other area is the banks. I’ve told you for the past year and a half that nothing bad happens to the stock market if the banks are not leading to the downside. We’ve seen at least since September that markets can go up perfectly well as long as banks don’t drop. The BKX topped in February and while the market stopped going down in March, the banks initially played along in sympathy but lately reversed course. For the first time in a long time, we truly have a lot of the market going one way and the banks the other. If there is one saving grace, the BKX hit the low for the week on Thursday on the one year anniversary to the April 2010 top. It is significant for 2 reasons. First of all, our Gann work suggests that anniversary points are very important. Second, that means we are very close to the 261 trading day window from the top and that happens to hit on Friday, right in the window clustering with the 233 day move off the June top in the US Dollar. The fact that we have a 2 day Fed meeting this time only makes all of this that much more exciting. As far as I’m concerned, I’m glad we had the day off on Friday because it gave me a chance (and hopefully you) to recharge the batteries because I live for weeks like this. This has the potential to be the kind of week I got interested in this business in the first place. There’s likely to be plenty of opportunity for every different kind of trader. We could have a choppy week giving short term and intraday traders what they like and for those of you who like the trend, it’s very possible we could set sail on a new course by week’s end.

I don’t know what they could really accomplish in this Fed meeting but if they announce an end to QE2, the Dollar could bounce big because it’s right on the time window. That might not be good for the stock market since equities seems to be quite satisfied with the status quo. Do you think the stock market would RALLY stride for stride if the Dollar suddenly took off? Stranger things have happened but I just don’t see it.

One thing that could be accomplished probably wouldn’t get a lot of publicity, if any at all. In case you’ve noticed the USD-JPY has come to the support line from the first phase of the intervention in March and the Yen contract has violated that same line. That tough because it ended up being a launching pad for the next phase into the end of March and early April on an excellent Gann square of 9 reading. Right now, the intervention is close to failing. If support on the USD-JPY breaks and resistance on the Yen contract melts we could end up with the classic Andrews action/reaction sequence and end up in the exact same boat currencies were in on March 16. We could see some serious around the horn intervention this week by governments and central banks once again. If they are going to do it, now would be the right time. So I’ll ask you the question, do you think they follow these time windows? By the way, the BOJ does meet on Thursday.

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