Is market nearing a fear climax?


Just got back from the Las Vegas Traders Expo where there was a good crowd of people willing to take control and responsibility for their trading future. Given we live in such emotionally charged times, this is a good thing. We are hitting a very important sequence in financial markets but hidden in each sequence is opportunity if you are courageous enough to look. Society may be in the grips of a fear program but that doesn’t mean you have to be. Understand the psychology but do your best to separate yourself from it.
As I was traveling home I surveyed the various headlines. Here’s a few courtesy of my mobile CNBC app. “On Brink of Failure, US Debt Committee Says Its Gridlocked.” Or how about “Deficit Deadlock May Send Chill Through Markets.” Or this one, “Can Europe’s Crisis Force US Funds to Break the Buck?”

Finally, we have “The MF Global Money is Probably Gone: Source.” This comes on the heels of a rough week in Europe. So why am I going through this exercise? Its possible fear and sentiment levels get so thick this week we can finally get a resolution and bottom out. Certainly we do have a good start to send fear levels to new heights for this selling wave. One can feel it, the negativity and bad headlines are starting to build. The week could be topped off (or is a better choice of words bottomed out) by a new spectacle of a do nothing Congress doing nothing. Did the market really expect any miracles?

So we are in a place where we are potentially one rout away from a fear climax. Need something else to get fearful about? The SPX potential triangle broke to the downside but now has a major congestion area holding it up. As you know my ongoing problem with this market has not been the bears that haven’t been able to get conviction, it’s the bulls that never came to support it when they had the chance. Everyone is now watching 1,200 in the SPX. We ended the week at a 38% retracement of the move up off the October low. We are there right now; this is a chart that has no more room to go down and if 38% doesn’t hold chances are 1,200 doesn’t hold either. I’m looking at 1,157 which would be the 61% level. Do you think fear levels would be in the stratosphere if that happened? So do I. The NQ already broke important support and now is likely headed for 2,150 which is another 100-point drop.

The other problem we have with this market is the technical picture in the key intermarket relationships that move inversely to the stock market. There is an interesting floor in the greenback we discussed two weeks ago which has held up. This has the look of a market that did not top yet. There was also an interesting Gann floor on the long bond which has continued to hold. If there is anything bullish to report it’s the latest leg up in the bond market didn’t look as strong as it could. But that’s like saying Tom Brady only threw two touchdown passes as opposed to four at this stage of the game. The bottom line is I don’t see that the Greenback or the bond peaked just yet. The next issue is the oil market finally hit a peak. But it had to; it has been straight up for nearly six weeks. I’ll be watching sentiment in oil very closely this week to see if traders focus on supply issues or demand destruction. Up to this point the market has been shielded by a lack of participation by banks and Apple computer with oil stocks. Without oil stocks we need Apple to provide leadership again. If none of them step up, well you can figure out the rest.

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