Technicals offer insight into 'strange' stock market

High drama in the stock market. That’s what Friday was all about.

It was a week where China was on holiday because of the Chinese New Year. We don’t think that rally is finished. Friday was the strangest day I can remember. We’ve discussed a potential high in the market. As a matter of fact some of the top technicians around were looking for tops last week. On Bloomberg alone market legend Joe Granville told viewers he was looking for the Dow to drop 1000 points each of the next 4 quarters. Then Tom DeMark came on and called for a top as well. We see the obvious and the calculations are in place. That being said, let’s look at the smaller details.

Click chart to enlarge

Someone is giving serious thought as to whether we are getting a top. This is a chart of the trend line since just before Christmas. The market has stayed in a very well defined channel and you can see the rising line is holding the rally. There were 3 important tests last week. But Friday was a day where we had a monumental test of that line on a 5 minute chart. The trend line was tested numerous times and would not break. It was all good for the bulls until the last half hour as a rally that pulled away from the line failed and as trading opened up on Sunday night, the line was violated. Look for important tests of support to start this week.

It was also a week short on controversy as the President or Congress didn’t mess anything up. Neither did Europe which is a breath of fresh air. It was also a week where the Fed told us they plan on keeping interest rates low through 2014. Obviously, the long bond responded because they always sneak in some Treasuries with their Operation Twist. However the market held up due to some traders believing we are entering another phase of easy money where the stock market usually rallies.

But this isn’t like QE2. I know some traders think because they are at QE2.5 (unofficially) the market ought to just take off. Realize that when they did QE2 the market had sold off into the September low of 2010, sentiment was really bearish because the banks were getting killed and it was September which is always a frightful month. QE2 and the symmetry (Dow 77 weeks off the bottom with a bear range of 7700) turned that market back up and because of the fear factor had plenty of room to go. This market does not have that kind of support from market psychology. Right now the VIX is 18.53 and was down on a day the market was down.

When the NQ came down to support there was absolutely no fear to it. I don’t know how to describe this to you other than to say when I’m watching the chart I somehow tune into the feeling of the market. I feel what a lot of people feel but have the ability to translate it in marketspeak if that makes any sense. Many times we’ll come to an important support level and it will scare me. One can also feel the emotions on television from the floor of the NYSE. Traders were very complacent about the test. After it held multiple times one could feel that bulls were a little cautious in buying back in because it took hours to lift but it wasn’t so much that buyers could take it up that bears gave up. But they came back in at higher levels so the market is not even close to being out of the woods.

My problem with this market has been the VIX since before Christmas. I’ve continuously harped on this point but I’m very concerned how the market dropped before Christmas without a rise in the VIX. I told you we’d have trouble by the time it started getting to 2011 highs. Well, we are there now as the NDX and Dow got right there.

We’ll see if this is the week we have to pay the piper. If we are to get a QE 2.5 or whatever they want to call it type rally, I think they need to get a serious shakeout. I’ve been talking about that as well and it hasn’t materialized yet.

The SSE was closed and so there’s no change in the chart. You can see there’s still room to go higher and so you can’t rule out the stock market holding out even though it’s on the ropes right now.

The next issue is the currency market. On Thursday we had turns in the Greenback and Euro which were on perfect Gann square of 9 calculations. Those charts even turned but by late Friday all violated those outstanding readings. On Sunday night the Greenback started bouncing from lower levels. What that means is we could get a good bounce and selling event in the stock market but the damage would be mitigated because the Gann readings are slightly off. Conditions are favorable for a storm but not a major storm. Let’s use the weather as an analogy. Conditions need to be nearly perfect to get something like a Katrina but what we saw last year with Irene is that the organization of the eye deteriorated as it approached the Northeast. The Dollar can rise with a Euro fall but they are not perfectly organized.

Next page: What can we expect?

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