FIBONACCI FORECASTER WEEKLY REVIEW AND PREVIEW
Markets were fine for the first part of the week as they continued from the turn at the 610 trading day bottom to the March 2009 bottom. To be sure there were problems. The biggest problem was the KBW Bank Sector Index (BKX). Here was a sector that was not bullish at all. In fact there was nothing redeeming about it. But what was not reported in any media is that the bomb that hit on Thursday was the 618 day window off the same bottom. So we a have low at 610 and high at 618. Numbers by themselves are just numbers. There are a lot of problems brewing out there. We’ve been looking for a retest of the March low (Japanese tsunami not ‘09). We got it in the NDX but not elsewhere. Something happened on the way to the SPX retest of the March low. Let’s go over them one by one. This is not necessarily in the most important order but they are all major factors why the market is in its most serious trouble since 2008.
Shanghai Composite Index (SSE): I don’t know if it’s the most important but it rallied all the way up to 2636 and turned very close to the 360dg line. It got knocked down so we are justified in being more bearish, just as we were justified in mitigating our bearish view prior to July. As you know by bearishness from April to recently was mitigated by the fact the SSE was above 2640. We’ve discussed it countless times in this space. You can see it on the chart below.
KBW Bank Index (BKX): Can there be a worse looking sector? Let me put another way. Can there be a worse market leading sector? The banks have been the one area which never looked bullish from last week and remained the black cloud over the market. As long as it couldn’t stay sideways, markets had a problem. It couldn’t even stay neutral through Labor Day.
Long-term time series: Trading day 610 gave us a low, albeit from lower levels than originally anticipated with more damage to the near term chart. Day 618 set off a bearish bomb and activated problem children like the banks.
Action/Reaction: The Black Swan caused the market to drop parabolic ally and on the bounce we never had the kind of polarity flips we discuss in this space 24/7, which I like so much. Now you know why if you were still wondering. The straight drop led to the spike straight up which led to the market action reacting straight down again. The 618 bomb activated it. The way this syndrome finally breaks is if support holds and people realize the sun is still in the sky. The order of business from now to the end of August is to see if the low will hold.
Bond Market: The long bond tried to go down but was interrupted by the mid-line of its channel and an excellent reading on the Gann square of 9 calculation. Ever since the square of 9 calculation materialized the chart has been higher and my concern is I still don’t see the calculations for the high. The higher this goes the worse it will be for the stock market. I think it’s the biggest threat to the economy because this one is sitting on the precipice of a new credit bubble. That may seem fine but I don’t how a bubble in the bond market can do anything but end very badly. Longer term interest rates which are incredibly low can literally spike overnight as can all of the shorter rates all the way down to the overnight rate. Remember the problem in 2008 was the spike in the Ted Spread where banks didn’t even trust each other. A bond market that pops will be accompanied by some unpleasant event. It could be any number of conditions but the one people are focused on most right now is the events in Europe.
Is that enough for you? That gets us back to a retest of last week. The problem is that last week’s sequence ended with the feeling that stocks were going straight to the center of the earth. We are close to the lows again but without that feeling. How low would we have to go in order to feel like the sky is falling again?
Do I have anything GOOD to tell you? In fact I do. We do have a major calculation working in the USD/JPY off the 1998 top (see chart below). You have to feel for the Japanese who never seem to be able to get an intervention that can work. But in this case the conditions are very ripe. On a square of 9, the action has dropped 619dg or just one degree over the magic 618 number. That doesn’t mean it will work, it means if it is ever going to work, this is the right time and place for it. You can see it on the long term chart below. The other factor is market psychology. As you know this whole mess started with talk of a ‘soft patch’ in the economy. I’m still trying to figure out what a soft patch means. But we went through the soft patch psychology through the whole roller coaster period from February through July. Then we had the Black Swan event where conditions finally dropped for real.
Personally, I think the Black Swan is over. So you are not confused let me clarify that statement. Just because I think the Black Swan is over do I think we are in the clear? A Black Swan is simply the event not foreseen and very difficult to predict. We had a very strange psychology married to the debt ceiling where the smartest guys in the room couldn’t comprehend the incomprehensible. Well, the United States in fact did not default. But that doesn’t confirm a bottom. I think it’s very easy to see how the bottom could violate. I’ve outlined it above. So what could happen is a Black Swan leading to a bear market.
But I digress and here we are where the discussion everyday centers on the R word and D word. Few were talking about a recession two months ago and market participants as well as media pundits are finally talking about a depression. Good! The sooner you can get the market out of denial the sooner it can come to a final resolution. It’s an advancement over the psychology in this market at any time since the top in 2007. Keep in mind; we don’t necessarily have to take out the 2009 bottom in order to feel worse about it. The key point is we are finally feeling worse about it. We’ve gone from an era where we’ve labeled the crisis the Great Recession to a possible depression. I’ve been wondering when it would happen.
That’s leads us to this week. The NQ has the calculations in place for a low on the low in early Sunday night action. Whether it materializes is another story. But given the late August action I think that whatever test of the low is coming will be a battle and I don’t think it will breach so easily.
By the way, I am doing the Forex show in September with Dan Collins and Sam Seiden where we’ll discuss the correlations between commodities and currencies.
By the way, I’m going on vacation this week so next week’s column will be very short. My regular column will resume in two weeks.
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.