Another week, same old sentiment just a different country. The scene shifted to Italy which at first blush we were told is too big fail but too big to save. By Friday they were singing a different tune. Word is Italy isn’t going to fail, all that will happen because they are in a much better situation compared to Greece with a surplus is they’ll have the credit severely restricted. That’s not good but could be why we only had a one day shake out. But this one ruffled a lot of feathers because it seemingly came out of the blue. It didn’t come out of the blue. PIIGS means they’ve been anticipating for a long time. There’s no surprises here which is likely why we didn’t have a Lehman moment.
For our part, we didn’t necessarily know what news event will turn the chart but what we did know is a storm was brewing with a great reading on the Greenback and the near term emotional low on the long bond did dictate the rest of the week, much as we said in Tuesday night’s STU.
What has changed is the fact we had an excellent dynamic square of 9 reading on the Greenback which accelerated the chart and it pulled back to support where it appeared polarity was about to flip the pattern sky high but somehow the 77.68 level that needed to hold did not and now Tuesday’s low is once again being tested. If the general area of 76.67 does not hold this would be very bullish for stocks, good news likely comes out of Europe and the risk trade will be back full steam ahead.
Speak of the risk on trade here we go again. Most noteworthy to the week was the lack of downside participation in the energy complex. The sentiment there has not changed and is one of supply concerns as opposed to the demand destruction we see during bear phases in the stock market. That could be the market ‘tell.’ Whatever the case, oil is pushing at $100 and if we were really going back down, oil likely would have been part of it.
Another major issue is Apple computer which finally broke down last week. That’s 12% of tech and even as such the NQ/NDX complex had a great Friday. In fact, it was excellent since Thursday evening. Either AAPL starts recovering or tech is going to have difficulty going further. But oil stocks are absolutely picking up the slack here. Without AAPL, I doubt the market could even advance without oil stocks.
This is a crazy market to be sure but the leading pattern at this point overall is the pending triangle in the SPX which is materializing NORTH of the congestion zone that is protecting the bottom. If in fact the SPX is in the latter stages of a triangle we could be in for a rough, choppy ride to start the week but conditions could improve later on. We are now entering a window of an important time window and given the seasonal factor and proximity to Thanksgiving the next 10 days would be the usual time for the start of the Santa Claus rally.
Next page: Will Santa come this season?
I’ve heard there is sentiment out there that so many people are expecting a Santa Claus rally that it won’t happen this year. That’s nonsense. We are not anywhere near euphoria anymore. As long as we have bears willing to short on the slightest pretext of the end of the world in Europe, there is a significant portion of the market that is not expecting any rally.
The near term picture on Sunday night had the NQ taking back more than 61% of the losses experienced last Wednesday. Friday was one of those days were most of everything worked for bulls. Late in the day a near term topping pattern materialized but for whatever reason it just would not drop. The payoff is that on the open Sunday night the NQ gapped higher, the Greenback gapped slightly lower but the kicker was the bond market was closed on Friday.
Was it a case of the mice at play while the cat was away? The early indication is no because the long bond also had a small gap down. Additionally, in early trading for charts I don’t normally discuss in this space the Aussie Dollar was set up to go higher on Friday’s close and the first move for the week was higher. Copper was higher as well.
At the end of the day (or week) we had a market where many people felt the EUR-USD had every reason and excuse to go lower. If a market is supposed to go down and it does not, by default it generally goes higher. My view has not changed. We don’t adhere to the doom and gloom scenario. We don’t think we’ll see a panic on this round simply because too many people are looking for it. That doesn’t mean we can’t have one next year or even after the seasonally good period for stocks. If they don’t crash and burn in the September/October period chances are they don’t do so until the March/April time period. Even though bears are so willing to get short they don’t have the conviction or follow through to keep it down. If they did, we wouldn’t see the NQ back above 61% of the Italy scare last week. If this continues sooner or later bears are going to totally give up and then you won’t have sellers in this market.
If there is a problem with this market it’s the fact a CNBC report by Gary Kaminsky suggested about 40% of fund managers have missed this move off the October bottom. We discussed this last week. For a market to go higher we can only get so many short squeezes, we need to see longer term buyers come in. But if they do come in, there’s supposedly plenty of money to take it higher. Here’s the part that most people can’t seem to put the brain around. How is it possible that there is so much short covering near a longer term high? Markets are designed to fool most of the people most of the time. This is certainly fooling many because shorts are supposed to cover at bottoms. However, the process is short covering leads to intraday trading and swing traders who provide liquidity to the market. Only after such a period do the longer term players their toes in because that segment of the market really doesn’t pay much attention to the technicals. The fundamental guys have already said this market is cheap. I don’t care about any of that. All I know is sentiment certainly gets very bearish very quickly. In prolonged bear markets the early phase is usually a period of complacency and/or denial. I think we already had that period from February to July when all we heard was the economy was in a soft patch. In any bear phase once fear levels go through the roof you are closer to the end than the beginning.
The chart of the week is the Greenback hourly that shows you the 36dg reading from last Tuesday, a spike up and short pullback where polarity tried to flip. Instead we had some mild signs of unwinding. The big moment this week will be the retest of Tuesday’s low. Depending on what happens there will be how the rest of the week goes.
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.