A lot of the conditions I was concerned about have come to pass. This has been a perfect storm of Gann calculations on the dollar and long bond as we’ve shared over the past few weeks. Then we correctly identified the peak in the SSE. What else is there? Oh yeah, Europe. Well Europe hasn’t defaulted as it has become an incredibly long and drawn out process. It’s just the perception and worry that Europe will crap out that’s creating all of this. Roosevelt was right, all we have to fear is fear itself. When it seeps into the mass crowd psychology it’s a tough cycle to break.
It was the week of the Super Committee failure. The moment of the week was when Jim Cramer (Cramer of all people) asked some Congressman if he thought that politicians from both sides of the aisle dislike themselves more than usual. Cramer actually compared the situation NOW to that of 1860. You know what happened in 1860. He was serious. By the way, the Congressman never gave him a straight answer.
So where’s the Santa Claus rally? This was the roughest Thanksgiving trading week since 1932. We came to realize the Santa Claus rally potential would get mitigated by the Dollar and the bond market. But those are near resistance and I told my clients over the weekend they should hit turbulence. As I’m writing this on Sunday night the equity markets had a mighty gap up and the Greenback gapped down. This looks like it could be what I’m looking for.
The prospects for a Santa rally coming out of Thanksgiving appeared muted but pressure has been building and sentiment has become really sticky. The VIX may not have hit the new high for the past couple of weeks but you’d be hard pressed to find a week that was more negative. With all the political backlash even I had to turn the sound off the television. But Friday started off well enough with a spike straight up in the NQ but it gave it all back by the close. That’s 2 days in a row where we saw extreme weakness into the close. Is that good or bad? Well, the spike up Friday appeared to be short covering. At this stage of the game, short covering is a silver lining.
Overall, I think MF Global is a bigger reason for the decline than most people realize. I know I’m in the minority but I feel that way because markets have been going down even without Europe defaulting. On the one hand we have perception which has been moving the market, on the other hand we have a malaise, a lack of confidence or even trust if you will that reminds me of what we went through at the end of July. I think traders as well as the public at large are really tiring of it all. MF has done nearly as much to sour the public’s trust of the SEC and financial markets as Bernie Madoff. It’s a bad thing, I now know someone PERSONALLY whose account is affected. But in the macro picture this is the kind of thing that speeds the process of the bear. When did the Bernie news hit? Wasn’t it December 08? It was 3 months before the bottom. What I’m trying to say is these kinds of events materialize closer to bottoms than tops. If there is a silver lining, that would be it.
I’m looking at this year as a big B wave down and now it’s been going on all year talking about the October extremes, when equities come back down to where they were and the Greenback up to where it is it didn’t have to happen. But it is what it is. The point is technically it’s not good to be back where we are.
On many charts, the October low is the dividing line to the first half of the bull market from the 209 bottom. If the polarity lines don’t hold, the people who got in during 2009 are going to get mighty nervous. We could get a fresh round of unwinding as those levels get hit. They could all run for the door at the same time or it could be a consistent exit drip everyday like we saw in 2002. I’m not saying it’s going to happen, all I’m saying is if support doesn’t hold those people will start to seriously unwind and that’s how you’d get a retest of 2009. We don’t know and this is just hypothesis but if that were to happen one would think with the VIX already in the 30’s that fear levels would rise through the roof very quickly and it would be a short-lived event.
But it may not happen now; seasonally we are not in the time of year for it to happen. The Sunday night activity should not surprise anyone. It’s seasonal and taking it one step further it is the back end of a 144 day trading window to the February peak.
It might take another bounce to fail to open the real flood gates. We didn’t see the real disaster scenario playing out in 2011 but it speaks nothing for 2012. That’s a whole new ballgame. This is a bear that essentially started in February. Look at the October 2007 to March 2009 period and that was about 18 months. The good news is we are already 10 months into this thing. Don’t be confused about the Madoff comparison; we could be close to another bounce phase but still months from the conclusion. Whatever the case, events like MF don’t usually happen near market tops, that’s the point.
If this is a trading range kind of market we could stay in it for another year but we should be close to the next bounce leg. Everything depends on how bearish we can get right here. THIS IS THE WEEK and the test of whether the buyers come in. Bears have not really been convicted up to now. This is their true acid test, are they going to get stubborn at the October low? Or might they cover? They covered on Friday, at least some of them did but it was given all back by the close. The fact we had the gap up on Sunday night proves my whole hypothesis, they’ve had their way lately but still haven’t proven they are incredibly convicted.
Looking at China, it’s now one week away from an important time window. We know it found a high early in the month and technically speaking materialized because of a classic Fibonacci ABC relationship. The small C leg on the way up was an approximation of .618 to the A leg. That’s a classic bear rally calculation. We’ll be watching as the last low hit close to an important window as well. Here’s the chart of the week which is the monthly CRB futures chart. What you can take from the CRB chart is a break of an important parallel warning line as it represents a rough Thanksgiving that we haven’t seen in our lifetime. But look deeper. Look at the brown line. When we connect the bottom, the June 2010 low (end of the April correction in equities) and extend it, we see the October bottom holding at that line. You can readily see where we are in relation to that line RIGHT NOW. The stakes could not be higher.
Click charts 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.