We’ve been looking for a shake of the trees. All we got were a few gusts of wind. One of the reasons last week was mostly bullish was China, which finally got off the schneid and put in 140 points the first 2 days last week. Since the jobs number a week ago Friday, the market has been higher even as the slope of the move has leveled off. But Friday was incredibly interesting.
Europe finally growled. Most of it came from Greece initially as negotiations broke down. The rest of it came from S&P which downgraded the whole lot. This is the same rating agency that gave all of the mortgage derivatives a pass six years ago. Never forget that charade. The financial media with their incessant 24/7 reporting is out to scare you. I suppose very good or bad news translates to ratings.
By Friday morning the markets were due. It was also day 720 off the March 09 bottom and we at least got SOME reaction. But the market went down for half the session and then bears did what they’ve done most of the 2nd half of 2011. They disappeared. There were a couple of points the second half of Friday where they could’ve extended something but had no backbone. If you are trading intraday it’s not that big of a deal. But as usual there were plenty of people getting short on Friday morning there and committing big bucks to this Europe spectacle.
All I can tell you is for all the bluster and fear mongering, Friday ends up with a small bearish candle body but a lower tail which means they can’t take control of the market.
Click chart to enlarge
This chart gives you a great visual of what is really going on. First condition we can all agree is the bears had their way in Friday’s first half. No doubt about it couldn’t even get a good trend channel or pitchfork going due to the steepness of the move. But the game isn’t won in the first half. The leg off the low went further than I ever dreamed. Now look at that brown line across the screen drawn off the high end of the early part of the drop. I never thought we actually get around to testing line 1 on Friday, not after the big move down. This is a 15 minute chart and to really appreciate the move you should look at a 5 minute, it was straight up. Then we had a pullback leg and it looked like we’d get a retest of the low. But only in hindsight did I realize there was a problem with the bears when the short covering went too high. Look at the afternoon leg up. It went straight to line 1. There were 2 small attempts by bears to take it down which failed miserably. At 5 minutes before the closing bell I thought it could drop because it was a 3 day holiday and didn’t think traders would buy into the absolute close. I thought there’d be some nervous people pulling out. However it only went above line 1 AT THE CLOSING BELL. The action above to the extreme materialized AFTER THE CLOSE. All of this materialized after traders already knew they’d downgrade the continent after the close anyway.
What happened to the bears? Now do you see why I regularly put down the bearish case in this space? At the end of the day there really isn’t major conviction from them. Yesterday was the kind of day where the Dow might have been down 300-400 only 2 months ago.
To add insult to injury for the bears there was a trading session from Sunday night to Monday morning. By lunchtime on Monday markets were even higher, almost retracing Friday’s entire move. It’s hard to tell who is taking these short positions but it isn’t Aunt Mary and Uncle Bob. With the breadth and speed of how they covered on Friday someone had to lose a bunch of money. But at the end of the day when you look at the V shape of this move most of the short covering took place where bears accelerated the price action lower so some of them ended up breaking even.
Next page: Putting price action in perspective...
Now let’s put Friday in perspective. Here’s the banking index which looks as good as it has in a long time. We should be hitting some turbulence soon as price action is finally going to hit the ridge of resistance from the latter part of 2010. But this is the best rally banks have had since the 77 week lift-off in the Dow back in the autumn of 2010 when they announced QE2. It has a good chance of testing the 200 week moving average. But the takeaway from this chart is you can’t even see Friday’s attempt to take the market lower. So is everything rosy? Are we going straight back up? The SPX chart going back to the May high is a very good GPS system. First of all the dark blue line is the median line to the longer term secular bear market I’ve shown you from time to time. The light blue rising median line is an intermediate from the 2009 bottom. Here’s where it gets interesting. The descending brown line is the trend line that has contained the move since the May peak last year. Then we have a couple of brown rising lines which take the form of an ending diagonal triangle right here. There is also a dotted brown line which intersects the longer term median line from 2009. Here are the scenarios. The market can elect to top close to where we are now with the rising wedge. A move like that if validated could take us down to the November low which was the start of the Santa Claus rally. That projection comes from long term observation of what happens after wedges peak. They usually go to the origin. The other scenario if we break through these lines we go a lot higher and meet the rising dotted line somewhere near the median line from 2009. More than likely that would be the retest of the 2011 peak I’ve mentioned here.
With all of the news coming out of Europe, they didn’t celebrate MLK Day on Monday. They were open for business and their markets shrugged off all of the downgrades. Take that for what it’s worth. Here’s where we are at. The SPX is aiming to create a wedge or it isn’t. In terms of sentiment, we are not quite there. The reason for that is bears would not be able to take the market down the way they did if conditions were euphoric. We are not euphoric, nowhere near it. The last time we had real euphoria in the market was the day they hot Osama Bin Laden. If bears can dominate even half a session we are not in a position to judge that the market has only one place to go which is up. There’s plenty of doubt about it. Right now we are in the stage of ‘wonderment’ that the market can survive a day like Friday. In terms of the bigger picture that means there is more to go to this move.
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.