Stock's surge, correction classic test of highs

Eighteen thousand; 18,000! No, it was 18K. They are kidding, right? While the NDX was hitting new highs on Thursday a handful of economists revised their outlook from 125,000 to 175,000. They revised their outlook more than the sum total of the entire result!

You want to know that that means? That’s the dose of euphoria when the stock market hits a new high. For the NASDAQ, it was the highest close since 2000. They certainly made sure you didn’t forget it. The truth of the matter is that in technical terms we had a retest of the top and couldn’t break through, no matter what the circumstances were. I believe it was 2005 where tech came to same level near 2100 4x before breaking through. It challenged 2190-2219 twice before breaking through. So what we are going right now is nothing new. It should be a struggle to get through important highs if for no other reason it’s an area of supply/resistance and smart money traders look to sell there. In this case, after a strong rally from the middle of June, it certainly is a place the smart money looks to take profits.

But last week we left you with the condition where most of these charts were coming to the all-important supply imbalance points that were the secondary highs. There was a little turbulence there but not as much as I anticipated. The charts made it through with fewer struggles as opposed to more. It didn’t have to be that way.

Oil was also at important first resistance but cleared through very nicely. Same with China. The SSE looks like its weakening at this point but still has some room to go. The US Dollar peaked on Thursday, hit a high on some really good Gann readings but didn’t sell off. By Sunday evening it was all the back to Thursday’s high. That adds to the drama that is this week’s market.

Traders used Friday morning’s stellar jobs number (lol) as a good excuse to take profits. But the selling could’ve been a lot worse. As I am writing this on Sunday night the NQ has given back about half of Friday’s recovery. The key point to all of this is as you can see on the NQ chart is Friday’s selling stopped right near the supply imbalance secondary high point that was resistance from last week. As we start the week it is attempting to become support. You can see how close it is the May top.

But as the job number came through the bond market was threatening to break down. As you know a week ago it came down to important support which was the March high. On Thursday night I told subscribers it wouldn’t resolve until Friday morning and it certainly did that. There’s something very strange materializing out of this sequence. It’s very odd that with Congress playing Russian roulette with the debt ceiling that money would rotate out of stocks and into Treasuries. As lousy as things appear to be, they aren’t quite as bad as it feels. This time someone came in and bought those bonds and I don’t think it was Helicopter Ben. Going forward, the stock market recovered late in the day and the bond market didn’t sell off equivalently. That might be a problem for stocks this week.

So what can we expect here? Coming into the week and for the majority of the week sentiment wasn’t what we expect out of market tops. There were a lot of people discounting this rally and still continue to discount it. But finally some excitement did come into the market most manifested by economists who really are missing the mark. How is it they can be so wrong? There was only one silver lining in the cloud where a one third of the jobs created (6000) last month were from manufacturing. We already commented that industrial machinery manufacturing stocks were one of the biggest beneficiaries of this rally other than tech. That’s why I’m not going to get too upset over the uneven recovery.

But here’s what I am upset about. I’m still in amazement how the Administration would elect to release the Strategic Reserve in historic fashion when oil was in a down trend. We’ve covered the Nixon price controls which the public thought was a good idea at the time but we all know they never WHIPPED INFLATION NOW. Price controls don’t work and since they made the announcement oil prices are up over 10%. Of all the conditions we’ve covered in the 4+ years we’ve covered markets in this column that was easiest to call. Speaking of oil, we had another interesting turn of events last week. Now Exxon has their hands full with a spill into the Yellowstone River that is more serious than initially reported. Was oil higher or lower after we discovered Yellowstone Tea in the river? You hereby have your answer about the overall psychology of the markets.

Next page: Bullish in long run?

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