A Black Swan is an event the goes beyond what is normally expected in a situation and extremely difficult to predict. There are only two kinds of people in the world: Those who understand how financial markets work and those who don’t. The problem right here is that those who do understand how financial markets work can’t possibly believe the outcome of this event would fall into the hands of the people who don’t know how the markets work. In other words, the inmates are running the asylum.
You see, the really smart people in this industry can’t believe the United States would actually come to a self-inflicted default in this situation. In the past two weeks, markets have climbed a wall of worry even with the belief that through a long and winding road a solution would be reached. Here we are at the edge of the cliff and unless they are totally misleading the public, they are as far from a solution as they’ve been at any time in the past seven months. Of course, I’m not going to factor in what those extremists in the opposition party have to say, the only person who has any credibility in financial affairs that I’ve seen interviewed in the past month who didn’t think a deal would be reached is Alan Greenspan.
So let’s talk about these markets. In the past week we’ve seen tech leadership take the market higher. By tech leadership, I mean stocks like AAPL, MSFT and GOOG. It started as a narrow advance and started to broaden. The SOX came out with excellent calculations at its low and took the market higher.
The broadening effect even included the banks which had their best week since last December. It was all good. But when I tell you the problem we are going to put aside the NEWS EVENT and stick strictly to the technical position and the cycles. What last week’s move did for us is get us a new high in the NDX. The other indices were lagging but close. The bottom line to the entire market is we are retesting the top. Tops are complicated and let’s just say that the smart money is disciplined to buy the low and sell the high. This potential Black Swan event would be a perfect excuse for the smart money to sell resistance. If you forget for the moment that we are looking at the top of a 2+ year rally and pretend this is just any old high you’ll understand this much better. Any top can be sold. The part that concerns me is the cyclical positioning of these charts. We are coming to day 610 off the bottom in the SPX by a week from Friday. That’s dangerous in 2 ways. First of all, if markets were to continue higher, the 610th day of any bull market can be its climax. That’s not a prediction of this market, just a generic statement for any market. The other problem is when we are so close to an important cycle point we always run the risk of an inversion. What that means is we get a LOW on day 610 as opposed to a top. In this case it would be dangerous because of the potential for an event that could be short-lived but very intense. While we would go through it, we certainly wouldn’t think about the end. So while you already know that tech closed the week near the high, this chart shows you how the banks played along and how close we are to that 610 day window.
It’s like what I just experienced. I just had periodontal surgery which is a short and intense procedure with a painful healing process. While one goes through it, you don’t feel like you’ll ever see the other side even though you know you will. Thank goodness modern medicine can prescribe something for the pain. The debate in Washington comes with no such mechanism. All we got was Tim Geithner telling us default is not an option.
So is there a saving grace here? Fortunately there is. Usually at market highs we get euphoria and there really hasn’t been much of it. In fact, it’s just the opposite and it really reminds me of what happened in February. Right now we are basically dealing with a potential triple top. In February, the selloff started the day everything hit the fan in Libya. Fear came in really quick and escalated to historic levels in March with the earthquake, tsunami and nuclear meltdown in Japan. In May markets topped on the small degree euphoria with the killing of Osama Bin Laden.
So let’s stop for a minute and remind you of the day the Internet bubble popped. Do you remember what happened? There was news over that weekend that the government would indeed pursue monopoly proceedings against Microsoft. Of course that was after a period of prolonged, intense euphoria of the Internet bubble. I’m not saying we are in a bubble right now. But I look at February and see the potential for a fear event to damage the current proceedings which is a fine looking move up lately.
What that means at the top is intense fear coming into the market can bring on not a long term top but a selling event more like what we had in with the Asian contagion. We eventually got through it but it caused extreme disruption to the complete financial system. Given the fact we are so close to the 610 day window, we do run the risk of an extreme short term event.
I’m sitting here on Sunday night watching these events with the same kind of disbelief that many who understand how financial markets work and know there has to be some kind of reaction because market participants have been working under the assumption that a deal was to be had. There still might be, but now the risk of a downgrade is much higher and that would likely bring on another selling wave. Why? The way the cycles are set up here, people may be looking for any excuse to sell and Washington is handing it over on a silver platter.
So while we are talking about Silver platters, Gold lifted right through the natural resistance level above 1610 and all the way up to 1620 in one bold gulp. Silver just busted through important resistance that kept it down since May. We are also thinking this is just the kind of event we’ve been pointing to on the Dollar for the past 6 months as the 121 month square out relationship winds down as we come to the close of July.
So as I sit here and watch this on Sunday night, I have to separate myself from the news event and think about what it really means in terms of market psychology. The bottom line here is these markets are not topping on euphoria, they are topping on fear which is an entirely different animal. That is the silver lining in the cloud. We are starting at fear and if it escalates, it would mean this should be a short but intense event.
For those who don’t understand how financial markets work and think a default is better, this is finance 101; hopefully the lesson is absorbed before it is too late.
Click chart 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.