Volatile stock market poses challenges for analysis

I would have thought the prior week would’ve been the one that pulled back but we had 2 up weeks instead of 1. That fact alone presented us with a unique problem. Parabolic moves are usually not sustainable and in an action reaction world what comes straight up can come right back down. For that reason the week was more complex than the prior and it exhibited all of the turbulence we may have had the week before but didn’t. I was reasonably sure the turbulence would finally come.

Nowhere was this more apparent on Tuesday when the people who went short on Monday got nervous and were squeezed out on a Guardian report that Germany and France had agreed to leverage 2 trillion Euro to save the continent. No sooner did the skyscraper appear on my NQ chart did they deny the story. Shortly thereafter what came straight up went straight back down as technology lost Apple computer. Maybe they were just looking for an excuse to sell, but without Apple leadership it will be really hard for tech to continue leading upward. We’ll have to see if it finds support at 390 early next week and joins the party again.

This is a market that appears to be held hostage by this European crisis. It’s getting to the point where I think news is being leaked to string markets along to buy time until they come up with a solution. The biggest loser is the US Dollar which has been threatening but is finally being whittled down through institutional support. Wasn’t it just 3 weeks ago the Greenback was threatening to break through to give us a deflationary scare? Certainly it can fall back to support and bounce, but it didn’t and really isn’t showing too many signs that it wants to or is capable. For that reason, the equity markets have their greatest opportunity to break through since the original Libya crisis took the spotlight back in February. I doubt it has anything to do with price action but as an interesting aside the fears that took the market down in February no longer exist now that Quaddaffi is out of the picture.

The next major hurdle to the stock market is the action in China which set a new low. Sometimes it’s better to be lucky than good. In this case, it’s somewhat unfortunate that China’s market was closed for a week while the rest of the world was in rally mode. There wasn’t much of a buffer as they were only able to rally for 1 week. Our markets are not at lows simply because they had the extra week to rally. But China has a very important time window this week and we’ll be watching to see how that materializes. What I can tell you now is the SSE has an opportunity to make a significant low by the middle of the week. This round could create a very significant rally.

The next hurdle to the market is Apple computer itself. To use a sports analogy, is AAPL out for a week or the rest of the year? We’ve had a progression for a long time where the banks were neutral; tech was led by AAPL which is 12% of the NASDAQ. Without AAPL it will be very difficult for technology to sustain a rally. We are not saying it can’t happen but the pattern is going to have to find support near 390 or close to it or it won’t happen. So it would appear we have all of these problems working against the market.

However, with several conditions against it, the charts are incredibly resilient. The best news I have for you is the BKX managed to maintain its uptrend channel and is starting to behave like it has the potential to lead. I know that’s a dangerous view because every time it threatens to go, it fails. But this is the best sustained action we’ve seen at least since August and quite possibly since last year. After the AAPL news, bears had a tremendous opportunity to take it down but they couldn’t and since we are coming to the end of October, with each passing day the bears are running out of time. October is the month of crashes and bottoms. With the NDX and NQ back at highs and the SPX finally above its August sequence it appears a little late in the season to start developing downward momentum.

If Apple holds the line the markets could be in a position to push higher. We are no longer in the sell in May and go away season. Without downward momentum from September and October the November time period could be very bullish for stocks. As far as the European situation is concerned my continued stance is we are not likely to have a black swan event when policymakers are not being taken by surprise. This wave has surprisingly done its job of scaring everyone out of their socks without really going beyond the April 2010 peaks. Those of you who subscribe to the Elliott theory know that B waves recreate the sentiment of the prior main trend in the same direction. In this case it would be 2008 crisis leg. We’ve been told to watch out for a Lehman moment. This is the sequel. Sequels usually don’t live up to the original and since we are at the end of October if there was going to be a sequel odds are it would’ve happened by now.

Next page: What in store next?

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