The news of the week is the continued surge in oil prices. All I’m going to tell you is the high last year is stiffer resistance than most people realize. We aren’t even there yet and prices are finally starting to back off. A lot of the risk on trade is going to depend on China which backed off the high this week on day 619 but recovered by the end of the week which means we should see a retest of the high. It remains a strong market especially if China can retest the high.
The stock market remained elevated this week despite all of the booby traps in the calculations. We’ve hit another, given the 144 day window off the August low. Why does the market stay elevated?
Simply put, the pullbacks we get in the middle of the day do a very good job of helping to reset the oscillators. Look at the charts themselves on a daily basis and it appears they are extremely overbought. But when you look at the VIX we see a low reading of 16.09 on February 3rd. The market is higher now than a month ago yet the VIX is not lower. We said in January when the indicator was dropping that for the move to continue, it had to find a way to refuel and not continue to drop. It hasn’t quite made up for the drop with share prices prior to Christmas but here it is a month later and the VIX is not one drop lower.
The high for the SPX on Feb 3 was 1345 so with a high of 1378 that’s a good 33 points without getting more euphoria. What that also means is lots of traders have been picking tops, buying protection and allowing the market to continue its slow melt up. As you know, we look for bears to fuel rallies and bulls to do the same on the downside it’s those bears that have to cover their short positions in attempts to pick tops that helps keep the market higher. For this week, that was most apparent on Monday morning where we were greeted to a sky high spike out of the trading range from the end of prior week. It set the tone for the week. However each day was greeted with at least one selling event. On Friday we even had what I thought was a mini crash on a 3 minute chart in the NQ.
Another feature of the market that has been confounding to bears is that when markets do pullback, they become one day wonders. Remember we used to use that term back in the bad old days of 2008 when the market would spike sky high for a relief rally? What I’ve been seeing is the reaction to the cycles and Gann calculations is the shakeout evidenced by that big drop in Apple computer a couple of weeks ago. That’s typical bull market behavior.
But if we are going to talk crashes, we had one in Gold on a 60 minute chart. It’s too early to say how far it will fall because we have better Gann readings for a high in Silver than we do in Gold. Silver is also reacting to a trend line going back to last April’s high. But I think the real culprit for the turn in the precious metals came from the Greenback itself which always takes its time and is a feast or famine type of market. Finally it had the bigger bounce off a 2 week selloff.
But the clearest indication of everything might be on the longer term volume rollover Copper chart. This is the chart of the week. What we have is an ABC up where A and C are close to equality. One leg is 71 points and the other is 73 points. As we start the week the price action is bumping into the A wave tendency line which is acting as polarity. The takeaway here is if Copper is going to fail, this is an excellent point on the chart for it to fail. I’m going to watching it all week as a proxy. Just for your information the data on the left side of the chart from the 09 low has a range of 337 points and the bear move last year was roughly 34 weeks so we have that 33.7 and 34 working at the low. That might be important as the low is a very good pivot. Just so you know, the low for this sequence was on February 17 which turned out to be the 261st day off last year’s top which means we are working on an inversion of the cycle and that is a bull market’s way of surviving. Anyway, that’s the way a cycle analyst looks at charts. The fate of Copper is largely going to depend on how well China fares this week.
Another bullish feature of this market is the behavior of the banks. We haven’t had to talk much about the banks lately because they haven’t caused us any trouble. A market where the BKX and China refuses to drop will not get into trouble. I think there is still room in the BKX and it has the potential to get all the way up to 50 and with a recent high of 45.96 that might not seem like much that still over an 8% move from here. In fact I think there is a very good chance the banks have put in a longer term bottom.
Next page: Attack of the 'ultra bears'?
Finally, I have to share with you that I’m get challenged by ultra bears who think the market is too high. There is a good level of disbelief that the market could be this high. I know I’ve made this point before but it’s worth repeating since I might be the only guy around that has brought you this calculation in the February 2011 issue of this magazine in my feature on Gann. Because of the symmetry dating back to the Dow 1987 crash leg we had a range of 1108. From the high in 87 to the low for the NDX on November 21, 2008 is 1108 weeks. The bottom in the NASDAQ in 2002 is also 1108. This is a 21 year cycle point. They don’t come along very often and I’ve been talking this symmetry since about the summer of 2009 when I figured it out. It helps explain in terms of the cycles why the crash and financial crisis hit so hard, it was generational.
You already knew that but what most people fail to realize to this day how that symmetry influences financial markets. I think we are in the very early stages of a new secular cycle. Does that mean we have instant prosperity? The country did not prosper after the 1932 bottom until they had a World War and the troops came home. I believe 1949 is generally recognized at the beginning of the great prosperity for the 50’s and 60’s. The market bottomed also around the turn of 1975 but we didn’t get prosperity again until 1982. But I don’t think anyone else has a better explanation of why the markets have been up the way they have now for 3+ years running. Nor do they have an explanation of why bears were ultimately frustrated when so many were expecting new lows last year.
We have our challenges but I’m not surprised the market is where it is. It has shown amazing resiliency. I’ll leave you with this. We are in March, the month with the Gann Master Time window at the equinox which is the most important cycle change point of the year. If we pullback this week we may find a low in that window. If not we may have a case sell in March and go away.
Click chart to enlarge