The markets are finally correcting. Measuring my words carefully, the market peaked around the seasonal change point but not perfectly on the exact date. In the world of market cycles close is good enough but when it misses perfect precision, the result is likely to be less than it might have been. That being said we don’t know exactly what ‘might have been’ would be.
If that confuses you, markets are not meant to be easy. However, the simplest way to explain it is that instead of conditions yielded a category 3-5 storm we can end up with a 1 or 2. That will be good enough.
Last week was the jobs number, always a political and economic hot potato. This time the reading was +120k when the experts were calling for around +205k. That’s not the news. The takeaway on Friday was that futures and the Greenback dropped big, which we don’t see very often. But by Sunday night, business was back to usual as the Greenback got those losses right back.
The Dollar has recovered much of the losses from March and I think it’s going higher, with a new target for this leg at 80.73. Once it gets there I think the stock market will start to recover as I think we are looking at lower prices for the equities to start the week. Well, it doesn’t take a rocket scientist to figure that out given Friday’s action but in the chart of the week, let’s just say that the intraday NQ reached polarity and the A wave tendency line of stiff resistance by Friday morning. They were looking for a reason to sell. For a change they could take their pick of events. The US credit rating was also downgraded by ratings firm Egan-Jones from AA+ to AA. This condition materialized in the aftermarket on Thursday and quite frankly I thought the market would get knocked down right there but it held up until Friday morning.
As I think the Greenback goes moderately higher I think the equity market only goes moderately lower from here. But that’s only the near term outlook. Lately, I’ve been pounding the table in this space for a complex and grinding type of correction. I’d write that and then watch the early week soar only to see the blood in the streets by the middle of the week. The bottom line to me is I think we are in a grinding complex correction. Its already here and you don’t need it be down 10-15% before you recognize it.
One of the first indications to me of trouble was in the XAU. Oddly enough metals attempted to bounce while the mining stocks were flat to down. The recurring theme in my mind was why weren’t the mining stocks doing better? The main reason I’ve been focusing on the XAU is the major test of support dating back to the congestion area in 2010, not to mention the October low. This is a sector that had no business being back down at the lows given the 3 thrusts to new lows since the December 2010 high and retest as late as December. Clearly something is wrong with the mining stocks and I have a hard time having any confidence in a fresh leg up for equities as a whole while mining stocks flirt with going in the tank. If we are going to build evidence we have strike one being the Greenback, strike 2 is the XAU. We have several candidates for strike 3, one of them being the SSE but that rallied once it came back on board last week. In case you didn’t know the Chinese took 3 days off for the Ching Ming Festival. They came back on and finished the week strong. But if anything, I’ve noticed that China can be sensitive to their friends in Europe and the chart that concerns me most is the FTSE. The FTSE has violated what looks like a wedge formation and is the clearest indication that Europe could be taking a break right now. The projection here is in the near term down to about 5612 but if we get bearish aggressive could see a grind down to 5400.
Next page: What do the charts say?
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The other area of concern right now is the Housing arena which quite frankly has performed this year beyond expectations. But that doesn’t do us any good right now. The HGX closed the week at 122.80 and right now has an average projection of about 118-120 but an aggressive leg can take it to about 112. Those numbers on the surface may not seem like much but the more aggressive outlook would give us another 8% drop. We’ve already had about a 6% drop.
So are there any rays of sunshine in this news? I think there is because when we came off the high the first time around March 21st a floor trader stated on CNBC that because the VIX failed to rise with the market drop he felt traders were comfortable with the lack of volatility and it would lead to a continued market melt up. My readers know different. The only time the market continues to melt up is when the VIX doesn’t drop when the market rises. This time the VIX is showing a rise which means there is respect for the correction if not fear. I wouldn’t expect fear this early in the game but respect means we are off to a good start. Keep in mind that corrections in bull markets end not because we get to a particular target but when sentiment emulates the London fog. First we get respect, and then we get fear. However if we start with complacency it takes that much longer to get to fear. Last week there was a little blood in the streets when markets got disappointed the Fed was thinking about passing on QE3.
At the end of the day it looks like strike 3 to me. With the Dollar, mining stocks and FTSE the bulls have to build a case to overcome that. With tech going the other way they are losing that battle as well. Is there any mitigating chart? I’d like to tell you it’s Copper but that one fell to the bottom of the range. The only real factor that can turn this market back up is Apple computer and right now it’s outnumbered. That being said I do think we’ll get a meaningful bounce this week but charts are in a bit of hot water for the first time in 2012.
Click chart to enlarge