How will stock market follow stellar first quarter?

With three steps forward, time may be ripe for two back

With the Ides of March behind us, so is the 1st quarter and a glorious quarter it was. Our New Year’s prediction stated 2012 would be a year the economy finally healed. I know the perma bears think doom and gloom goes on forever. It doesn’t. The trajectory of mankind is up. However nothing goes straight up and life is a process of three steps forward and two steps back. After three miserable years for lots of people, conditions are starting to improve.

At the turn of the year I would have been satisfied to see a modest increase in the HGX; it went beyond even the most bullish expectations. In the May issue I expose our cycle reasoning as to why we think the BKX 2011 low is a high probability bottom. If I tell you now…just read the article when it comes out. By the way the article will be my next in a series for this magazine on Gann squaring. The article also provides the firmest evidence you will see to support the 2008-09 bottom as at least a 21 year low and perhaps even a 67 year low. I haven’t seen anyone else do this kind of cycle work in a public forum. So we feel confident that what we put out here is the higher probability outcome and nothing has happened in the last 3 years to suggest otherwise. Gann is the star and the methodology withstood the debt ceiling crisis, the European Lehman moment (not) and the MF Global disaster.

But it’s not all a bed of roses. The season turns sticky in the 2nd quarter. We have to deal with the sell in May and go away syndrome. But being an election year I doubt things will be quiet. Thus far our Gann seasonal change point either gave us a high pivot before or after the date. Europe topped early and the US for the most part gave us fresh highs in tech and the SPX. By the way, Monday’s surge which took out the high March 19th high ruined a perfect Gann symmetry which may have ruined a perfect storm of a top. As you may be aware, the NDX symmetry of 1108 weeks off the August 87 high which also was an 1108 point range to the crash bottom which also spawned the NASDAQ low of 1108 in 2002. This perfect symmetry was 1109 calendar days up at the 3/19 high off the 09 bottom. It was too good to be true.

What bulls will like about this outcome is the market missed this perfect storm of a high. Think of the market just like you do the weather. Storms need perfect conditions to become monsters. If they have less than perfect conditions they can still do damage but will mitigate. A perfect example was hurricane Irene which was very well organized until it started coming up the coast and the eye started to disintegrate. Market conditions work mostly the same way. Since the SPX elected to top out of the Gann window without the symmetry it can still correct but we are likely looking at a Cat 1 storm as opposed to a 3 or higher. With the information I had last week I was looking at a grinding sideways correction to materialize. Instead Monday was the all-in day and there we were with a new high. But Europe never hit the new high, nor did the Dow, housing or banking. These charts are going sideways. Copper is going sideways so we are getting our grinding complex move. Monday was mostly up but Wednesday and Thursday were mostly down. There was also a brutal move south on Friday.

But there is a recurring theme to all of this. On each down day the bears let bulls back up. For whatever reason they didn’t, couldn’t or wouldn’t finish the job. One of the major themes of the first quarter concerning the bears was their inability to take markets down beyond an intraday surge. Thursday’s bounce was even better than Wednesday. In that view the bulls are gaining strength even though they do not have control of the market right now. Friday’s drop could not take out Thursday’s low on the NQ.

So why all the choppiness? I have a theory about that. To understand one should take a look at China and Australia. For those of you who don’t know, the Aussie economy is geared to the commodity/risk on trade. Their market has been going sideways for the better part of the last 2 years. In fact, they’ve missed most of the rally from October. If you read Australian newspapers you’ll learn their sentiment is they consider themselves to be tied at the hip to China. Lately the SSE has been down while the Aussie Financial sector has put on the best rally we’ve seen it came off the bottom last September to November. I have to ask why now? So with the Aussie banks rallying at a time that China is pulling back it has to make some people scratch their heads. I think the indecision creates a ripple effect that has caused us to have straight up and straight down days. We know oil stocks have been hit hard but as I stated Copper has gone sideways.

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