They were looking for an excuse to sell. Plain and simple. For once, the focus was not on Europe. The US has enough issues on their own to be concerned about. It was the week of Operation Twist and Shout. The inspiration was in 1960 as Chubby Checker's classic hit reached the top of the pop chart, the Fed converted short term debt to long term debt. Chubby Checker was on CNBC the other day and claimed "The Twist" is a good luck omen and brings nothing but money to all who embrace it. It appeared to have worked back in the day. Those of you who are not familiar, when you get a chance take a look at the Dow back then, it had a serious correction. But the country was in much better shape back then and that's why a lot of people ended up shouting about this latest incarnation. The Twist probably worked out better for Mr. Checker than anybody else. But right here traders and investors did more than shout.
The tech indices were right on top of serious technical residence. The NQ had an excellent square of 9 reading while the NDX made it all the way up to a ridge where the last group of people piled in which led to the top. The SOX hit important overhead resistance and had peaked a week ago Thursday. By the way, last week I told you that when the SOX stalled, the chart that made the most improvement was the BKX. It looked like it could be a mirage. Apparently it was. The NASDAQ made it to the high end of the descending bear phase channel line.
Since this was a tech led bounce, lose tech and what do you have left? While the banks were greatly improved but made no net progress at the start of the week while the market was still good. Then the market became bad and so were banks. So we were back in the usual inverse relationship with the US Dollar. Make no mistake, the Greenback dipped and flipped almost to perfection but by Wednesday night the Greenback had made a new relative high compared to its recent high on September 12 while the Euro had not made a fresh low. So this is an American event. One has to wonder how much longer all of this goes on. Here's what I think about the long term. What people don't seem to realize is the great secular bull markets come as a result of new advancement in technology. Look at history and you'll see from the time the railroad bubble popped it was nearly 60 years before the Industrial Revolution kicked in. For us, we look at the history books and just accept. The problem here is we are living through history. Its a recession if you don't have a job. Of course governments are going to try to do what they can. It's basic human nature. But nothing the government can ever do will ever compare to the engine of advancement when society makes a grand technological breakthrough. Think about history. The most important event from the time of the railroad bubble popped to the time of the Industrial Revolution was the Civil War.
But all of us have to deal with these markets and this economy starting on Monday morning. We don't have time for history or some technological breakthrough to rescue us.
In the shorter term, we hit the Autumnal Equinox and found a low. The bond market found a high. The Dollar ended weak and the Euro ended strong giving at least the forward momentum that something good or NOT BAD like a terrible surprise would materialize over the weekend. Thursday was a day where we had all kinds of bad news, lots of forced liquidation selling but no end of the world feeling. Do we need it after August? Probably, but Friday was strong. I told clients there was the possibility of a waterfall event for next week.
Those of you who know me realize I don't say things like that lightly. By Thursday I thought the odds were a 1 in 4 or 1 in 5 event. After the day we had to end the week it‟s even less probable. I‟d think the chances of a real waterfall in the stock market are more like 1 in 6. I can‟t take it off the table but we are more prone to a capitulation type event as opposed to anything that resembles 2008. But we rarely even talk about it here and I still can‟t take it off the table. Translation into English means we are right in the inflection vortex where anything can still happen.
Another reason we are talking about such an event is the conditions I see in the Gold market. Gold took out the prior important low which came in on an excellent Square of 9 reading and the last time I saw the XAU have a weekly candle like we just had was during the 2008 disaster. But lightning rarely strikes twice in the equity markets. While we are talking about Operation Twist, the Fed discussed taking on longer term debt. From my observations, we tend to get important highs within a couple of days of the Fed meeting. In this case Operation Twist came in right near the 161 day window off its February low on a daily 067 continuation chart. So if the bond market hits a high and the Greenback is close, its probably better for equities although I wouldn't rule out a capitulation type of day to uncertain duration. We have a serious test of the August low materializing and since that low comes in at 610 days to the March 2009 low, if breached on volume it could fall a long way. If we are going to hold on, I need to see the NASDAQ and NDX hold. Those are safe for now.
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.