Three weeks ago in this column I told you the stock market was in big trouble. Last week I told you the Greenback was in big trouble. Unfortunately, America is in trouble, too. Since we are a big believer in mass crowd psychology, we knew that soft patches which leads to “transitory” unemployment numbers is a recipe for a witches’ brew. The charts didn’t disappoint in that regard as the markets experienced one of their most rotten weeks in recent memory.
Is there any silver lining here? Maybe there is, it just feels like it’s getting too easy on the short side. Once it gets this easy, it’s usually close to a turn. Luckily, the calendar agrees as we are now within a week of the Summer Solstice which is one of the points in the calendar where markets naturally look to turn.
We’ve been telling you for about the last 18 months that nothing bad happens to markets unless banks are leading to the downside. This time they are complicit, guilty and leading the bear party. However, if you look carefully at this chart you’ll see Friday’s action finally at the lower end of the pitchfork channel and hit the lower end of the bullish channel dating back to the rally which started last September. What that means is if the banks break down from here we have to start thinking of this move off the top as something more significant. But they do have some interesting Gann readings and coming into the week conditions are at least ripe for a change of direction.
That brings us to China which hit a new low for the sequence last week. China does not have the calculations just yet but it will be 144 trading days off its November peak this week. Conditions are close to being ripe for a turn there as well.
But here’s what I see as the larger problem. Not only do Washington and Wall Street discount the possibility of a double dip, it appears sentiment isn’t even close to the level of fear needed for a bottom. That’s a big problem, especially since we are upon the test of the March low. The March low isn’t just ANY low. I wish it was. But the March low was the 233 day window in the Nikkei off its April 2010 top. That low was accompanied by the historic earthquake, tsunami and fear of an absolute nuclear meltdown. You know that. But now is the time to remind you we are approaching that low with nowhere near the kinds of fear levels that turned that market. I can’t imagine what could happen this week to get us anywhere close to that kind of discord. By the way, that low was also within a couple of days of the Gann master timing date of March 21, the most important turn window of the whole year. If we take out the March low, we could go A LOT LOWER. But before we start the funeral procession, we have very strong support in the Shanghai Composite at 2640; it’s a long term Gann square out level. As long as that holds, then fears of the worst for the Chinese recession should abate for the time being.
So the US has a transitory or should I say transitional phase out of the 2 year bull market at a time where they can’t get a grip on the unemployment problem. Suddenly local police and media appear to be in denial about another American problem. We’ve been following the ‘wilding’ developments in various cities around the country, especially in New York and Chicago. This is where disaffected youths make a cattle call on places like Twitter or Facebook and show up as flash mobs and spark crime sprees in the better part of town. We view this as the beginning of social unrest and it will likely be a long hot summer. So why does such a phenomenon end up in a stock market column such as this? It’s because I’ve had to read about it in underground blogs and publications and is largely ignored by the mainstream media. Even the police downplay these incidents. To us, this is just another symptom of the deeper underlying issue which is a psychology of DENIAL. Denial is always the early phase of an important correction and whether we are talking about soft patches, transitory employment numbers or crime waves sweeping our major cities, the sentiment is exactly the same. For once, Main Street is on the same page as Wall Street.
The US Dollar is also at a key point as it has spiked straight up. It made it through first resistance and hit the point where the last leg to the low accelerated. It’s at the point where it can fail right here or hit a couple of points higher. If that happens you can count on an exact test of the March low on charts like the SPX. Coming into the week the SPX has another 20 points to go and that would be easy to pull off if the Dollar goes marginally higher. For those of you who follow the 200-day moving average the March low is 1249 and the 200 is presently sitting at 1253.
Finally, we have the bond market which made an attempt to go down but held support with a flip in polarity at the 124 handle on the 30-year note. We’ve projected the bond market to be higher over the past month and while it’s required some patience, that has been achieved. The bond market still has some room to head higher. If you want to know what the stock market thinks of QE3, look at the move in bonds and equities since February. Equities are telling us enough is enough.
It’s hard to envision another week like last week or the weeks leading up to this moment. Perhaps the best thing the stock market has going for it is we are now close enough to the seasonal change point that a reversal will materialize. Last year, the stock market turned exactly on June 21. Keep in mind that next week is also the next Fed meeting. It falls right on June 21. I wouldn’t be the least bit surprised if we saw a change in direction by a week from now.
There’s another reason we could see a change of direction really soon. On Thursday afternoon I’ll be at the Traders Expo in Dallas at the Hyatt Regency at 4:30pm. Its seems like every time I do one of these events, we get an important change in direction. I was at the NY show when markets reversed in February and I can remember a couple of important Dollar reversals within a couple of days of shows in Las Vegas.