Some serious denial is going on about China. It was just a few weeks ago where China was going higher and climbing the wall of worry. Now, with the turn and prices in decline, worry seems to have turned to denial. As some of you know, we follow the Australian market in great detail. It’s instructive every now and again for those who don’t, to get a feel for what is materializing on the other side of the globe, especially when that particular market is driven by the commodity trade. According to News.com.au, there is the prevailing opinion among institutional traders in Australia who think the Chinese central bank has inflation under control and they won’t be coming in for a hard landing. Realize Australia has tied their economic fortunes to China.
Won’t be coming in for a hard landing? Is there really such a thing? I remember the last time I heard that was in 2007 when our economy got soft and everyone thought the ‘subprime mess’ would be contained. Well, you know the rest. Now I’m not implying the China is setting to crash, not by any means. But any and every recession comes with its share of pain. This one should be no different. But there’s something I want you to think about.
That’s never the kind of denial you want to see in a major news story or a belief seep into the floor of an exchange. It’s the kind of thinking of at least an intermediate term correction or even the beginning of a bear market. Australia has been in decline lately and when their institutional traders take a look in the mirror, that’s why. I know the sentiment isn’t exactly the same as it is in the US as it is in Australia. In one respect, it’s actually worse! The US is in denial about their relationship to China. That’s why I think it took 2 weeks for US markets to respond to the start of the decline in China. Remember my comments from several weeks ago about the SSE, it took a while but our markets started dropping after they got OBL.
On the following chart the intermediate term bull channel was tested last week and failed. A new darker channel line has taken precedence and any weakness will throw the price action into the serious path of least resistance down.
If there is anything redeeming about this chart it’s the fact we may have a wash and rinse low on the double bottom at the mid line. But that doesn’t change the fact the bull lines have been violated, especially after this pattern started way up in the path of least resistance up in the upper band. This chart has all kinds of implications. Mostly for commodities and the US Dollar. If this trend continues, so will the anti-inflation/risk reaction. You’ll see the Dollar go higher, the equity market go lower. Friday was a big day for the US Dollar. On Thursday I told my subscribers the minimum requirement targets for this bounce were hit. Initially some took profits but some bought the dip and now the first important resistance level was clearly violated. The Dollar is either a feast or famine kind of trade. It’s all or nothing. It was setup to pullback and allow the stock market to go higher but someone bought some more. But in a strange turn of events, Silver did not respond with a new low, nor did Gold or oil. But the EUR-USD did, breaking a good reading and now that one has broken its mid line on the uptrend.
It really was one of the choppiest weeks I can remember and by the end of the week, the NQ was finally in a position to either make an important violation of the move up from March or hold the line. Through it all there’s been no technical violation yet. But if there is the thought out there that China is coming in for a soft landing, I suspect there is more to this commodity trade problem. We want to watch Crude Oil very carefully this week to see how sentiment responds to the events on the Mississippi River. China should attempt a bounce and if it does, you could see a 24-48 lag in our markets as we play follow the leader.
Turning to the banks, the BKX broke the one year anniversary low from April 21st. The main contributor was lots of selling at Goldman Sachs which may have finally seen the day of reckoning. Most of the information I got about them came courtesy of Rolling Stone magazine last year. Apparently, the government has been reading RS as it appears they are building a case. The BKX really has no margin for error to drop as you can see its sitting on the big mid line. Not only was the low in April an anniversary point, it was also the back end of a 161 day low to low cycle. Those carry more weight than your average violation.
So if you are attorney for the prosecution the case is starting to build. The question here is whether this commodity drop has legs to it. The answer is simple. Does the downturn in China still have legs? Market psychology says it does. In my line of thinking, as long as China keeps going, commodities will sell. If they sell, the Dollar will be bought. If the Dollar is bought, we have no evidence the inverse relationship with equities will change. The next question is whether the Dollar has bottomed for good. I wish I could come here and tell you the Dollar is being bought for the right reasons, but it isn’t. It’s exactly the same psychology for every rally in the past few years. Unless that changes, this is just another phase in a long bear market. But I did hear an interesting piece of information on the Fast Money show this week. Mark Fisher, the legendary trader who was on the cover of the February issue of this magazine, the same issue that contains my Gann article, was quoted as saying the energy sell off has created a ‘fear premium.’ I’m in 100% agreement with that. However, a fear premium doesn’t mean oil has bottomed, it only means that at some point it will go back up.
The weight of the evidence is starting to build in favor of a bigger correction. Mind you, it doesn’t have to return to a bear market. At Lucas Wave International, we take this one step at a time. But for right now, when you look at the banks, you’ll see we are right at the inflection point of something bigger.
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.