The first tick of the year was a big one. While I don’t put a lot of weight on the January indicator I respect it. Last year the SPX opened the year at 1257 and the first 5 day close was 1271. That was slightly up. Do you know where the SPX closed the year? It was 1257, a perfect doji. I was surprised as well. January was slightly up. Any given year will not hold water but more often than not the year will follow suit.
Before we buy up the index and throw away the key let’s talk about the concerns for the year. They are Copper, the ASX and SSE. The ASX 200 represents the commodity economy and the similar to Copper is both are tracing out what appears to be a triangle which is progressed in the pattern. It’s a good news, bad news scenario. The bad news is we could break to the downside and set a new low. The good news it could be what Elliotticians call a 4th wave and any leg down could be the final leg in a bear phase that started about a year ago. The Shanghai Exchange had great calculations through December and was unable to exploit it to the upside. If it was just one chart it wouldn’t be such a big deal however the ASX 200 as well as Copper has very little margin for error.
I’m also concerned for the Euro which had excellent calculations to start the year, bounced strongly in an hourly Andrews channel and utterly collapsed. We don’t normally see collapses from the high end of a pitchfork like that. But did you notice that the Euro is down but the stock market was still up? On further review did you notice the Greenback being up in tandem with equities?
As we know the Greenback bottomed last May. It is setting new relative highs as I write this. If the inverse relationship of the past few years was still in force, wouldn’t the stock market be setting new lows? The new relationship isn’t ideal but the stock market is much closer to the high than the low, we know that. So what does this mean? One of 2 conditions is materializing. It could just a coincidence that both end up going the same way because the pattern could be in a multiyear sideways that has not revealed itself yet.
Or here’s the other alternative. We could be entering a new universe where the economy actually is starting to heal and the currency is appreciating along with the equity market. That would be a switch, wouldn’t it? If that were the case it would also mean that we’ve worked off enough debt that we take a long term deflationary depression off the table if the Dollar were to actually break above the 90 handle. The whole problem with deflation is debtors must pay back loans with Dollars that are harder to come by than the day they signed the note. Much of the problem real estate was financed with a Dollar above 88. But 5 years have gone by and a lot of this debt is being flushed through the system.
The market was very powerful last week. If you were trading the Emini at all you know that shorts didn’t work beyond a scalp and was relentless to the upside. Nowhere was this more obvious than with the first jobs number Friday of the year. One would have thought that with the powerful week we were setting up for a buy the rumor sell the news event but it didn’t happen. Sellers tried to take it down but all they got was an intraday trade. The rest of the day until the final 15 minutes was bullish. However, markets did peak late in the session Friday and did set up for some downside action even if it did not materialize on Friday. It is materializing to a degree in the Sunday night market. But the takeaway for week one of the year is a gap up which held. But with the Euro in near free fall and a VIX that borders on complacency, I’m looking for a shake of the trees where all of the coconuts fall out. In order to go higher we may very well need to get stocks into stronger hands and have the bears make another attempt to scare the Europe out of us before they would capitulate for good. Over the holidays we had 2 of the obligatory Europe is crashing type of days. Markets recovered and I’m sure part of last week’s gap to open the year was a short squeeze. But the latest scare before the New Year was accomplished while politicians were sitting on the beach or the ski slope. This week politicians all over Europe will take center stage and it’s a key week to hear about the latest Lehman moment. I suspect the Euro will fall more and the Greenback will rise more. Since the equity market is not perfectly correlated it is likely to drop, especially if the SSE can’t rise.
Next page: Short-term peak?
However, in early trading much of Asia was in the red while surprise, surprise the SSE was in the green.
However the NQ ended up at its highest level since markets turned back up at the end of November. The SPX is testing its highest level since the end of October. We should be hitting turbulence at these levels. We may have peaked for the time being with the NQ needing to retest the gap up. If not we probably only go slightly higher. I favor the high on Friday as the Euro drops to slightly lower levels before a bigger bounce. There’s enough momentum in the Euro for it to get to 125-126 against the Greenback before it makes a bigger bounce attempt.
Click chart to enlarge
In the stock market, we come to the first semi important timing window of the year. By Wednesday the market will be in the 720 day window off the 09 bottom. It’s possible we could be topping a couple of days early. 720 is an important geometric vibration and while it’s not as strong as some of the Fibonacci numbers we follow one must respect its potential. So while I do think a reaction is due I sincerely doubt we are looking at a market top given the conditions. When a market tops out for good there are more signs. First of all conditions tend to be more euphoric than they are now but also patterns give clues. Breakouts tend to fail and for right now breakout are materializing, not failing. Finally, if Asia continues moderately lower but the SSE does not confirm it that would be the most positive sign we could get. Let’s see if early conditions from Sunday night take root.
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.