Rare technical condition cascades through markets

This was a week where technical conditions deteriorated very rapidly. We discussed a waterfall event even as I still believe it’s a lower probability event. It ended up materializing in Copper. If Copper is an advance indicator for recession, we are on the cusp as it closed slightly below the 200 week moving average. The week started out with a Dow that was up 150+ when the NASDAQ was flat or negative. We haven’t seen that before. By late Monday tech almost caught up. But on Thursday we had the same problem. The Dow was up big but the NASDAQ was flat or down. The other problem was intraday rallies could gain NO traction. By Thursday it looked like the European bailout scheme was going to close because Germany decided to approve or guarantee it. Basically what they are doing is coming up with 440 billion and leveraging it to as much as 3.8 trillion to cover all losses on the continent. I think that’s good news. If this was 2 weeks ago markets probably would have exploded higher.

Getting a deal in Europe is what everyone wanted, isn’t it? Stock market reality is slightly different. When it finally materialized it was seen as a slope of hope high and markets sold off after that. If markets are going to sell on good news then they are in trouble, which they are. Two weeks ago everything bullish was working. Now every set up that’s bearish is working. But not only is the Dollar up, the bond market found important support and now has a clear path to retest the high. Doesn’t Operation Twist and the buying of 30 year Treasuries kick in on Monday?

Look at this NQ chart from the August low. If we break this down what we have is a likely short covering phase to start back in August. Then we had a wave of selling which probably extinguished any buying on the way up. Then we had a good buying leg and most of those bulls got taken out on the next dip. Then we had a final push to the high. Most of those participants could be gone by now as well. Now, after the Equinox is the first push we’ve had that broke the spell of higher highs. Consider that as well as the intraday fizzles from last week and you have a problem. Where are the bulls on this chart? IF you are wondering, they aren’t there. The only way they are going to be there is if the people who bought the first half of the bull market from prior to April 2010 hold on, will others get emboldened to come in. If whoever is short can’t push it lower they’ll start to cover. If you look carefully at tech, this sequence is testing the April 2010 high.

The source of the next problem is the bond market. Last week at this time we told you it came off a high which was not confirmed but only dropped to its ridge of support. It found a low and any selling has been met by stubborn bulls which propelled the action higher. Since the drop was consistent there aren’t a lot of points where serious turbulence could materialize. We could very easily see another test of the high. You can imagine what that will do to equities.

As you know Copper had one its worst weeks ever. The biggest culprit had to be the Shanghai SSE which has dropped all the way down to the bottom of an intermediate pitchfork. All attempts to put a floor on the market have been elusive as the Chinese; new to capitalism don’t understand there is no such thing as a soft landing. But Copper is now at the back end of a 161 day window from the February high and 144 weeks off its commodity crash bear market bottom. If Copper can’t turn here, something is seriously wrong.

This is my major concern. The grains and many commodity charts have sold sharply recently. They are close to areas where normal markets should change direction. But the US Dollar, with its bottom in May turned at month 119 which is very close to its 121 month square out. Ever since last December we’ve been pointing towards the middle of the summer. The Greenback was early but Gold was right there. The Dollar is looking like it wants to go higher, certainly above 80 but there’s a chance of 83 on this sequence. There’s lots of resistance in that area. So talk of a deflationary phase is slightly premature but should already be part of the discussion. If the Dollar at any point breaks above 83 it will mean the bear phase in equities will be making a serious dent in the old bulls who bought prior to the April 2010 peak. Psychology will then shift to a big retest of the bear market bottom.

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