The market had a rough and very uneven type of week. Monday was the day we had a crash on a five-minute chart with Tuesday being the day it was totally retraced. That’s right, you read that correctly. It had all of the elements. First of all, you can’t have a crash without a panic. The second half of that drop happened so fast it had to be accompanied with some margin selling. You can be excused if you missed it because crashes do happen in all time frames. Luckily this one was on a small time frame. Technically, in terms of Fibonacci relationships, this one dropped 6.85 times the length of the first little leg off that high. Because most drops that we see are either 161s, 261s and in some instances 423s, this one qualifies by virtue of the technicals alone.
If you didn’t know this was a three-minute chart, you wouldn’t know whether you were looking at 1929 or not. But the next day was even more bizarre. This move was totally retraced and the NQ ended up with a higher high. I can’t remember an instance on the NQ in all the years I’ve been doing this work where such a condition materialized. The one that comes to mind is the Flash Crash, but that one didn’t recover so easily.
With this kind of indecision, the charts spent the rest of the week retesting that low. The move was characterized by a 10% drop in Apple, which is now being hailed as a correction because it was down 10%. What amazes me is how the media portrays this market as an entity that still is dancing around from that elusive correction everyone was looking for in February. It’s not dancing, this correction is here, but it’s not getting much play because the damage isn’t much yet.
We have to like the Chinese action this week as it pierced polarity and opens up the possibility of the larger trading range.
Last week was a key point in time for the SSE as it took out first resistance and showed that it doesn’t want to test the absolute low. The positive spin is the mild recovery in Copper which put in an ABC low. What we don’t know is whether Copper has put in the low for a bigger trading range or will this ABC turn into a 4th wave spike and 5th wave low down the road. It’s probably why we avoid getting too tangled up with the subjectivity of Elliott.
It was obviously a strange week for sentiment given the early crash, recovery and subsequent retest of the low. There looks to be a floor not only on sentiment but the VIX as well, because it turns when it gets near 17. Events conspire to not allow the charts to get too happy. The problem remains that we dip on these big up days which ruins the chance to build up some respect or fear that could end this correction.
But I think the most interesting chart of the week belongs to France. I don’t think the market likes Mr. Hollande very much. As we know, no surprises materialized in the French election this weekend as the 2 main candidates, incumbent Sarkozy and challenger Hollande made it to the Finals. But of the 3 major European charts, FTSE, DAX and CAC, the CAC gave us almost no bounce. In what might be a warning shot to Mr. Obama, it’s looking very much like the challenger is going to win. Heading into the preliminaries, Mr. Hollande had a 7-14 point lead. You can see why. It’s not good for the incumbent to have the market drop in the exact month preceding the vote. If this complex/grinding correction were to last into October I think we’ll be looking at President Romney. But Mr. Hollande is the Socialist candidate and would reverse a lot of policies of the past 5 years and prefers to bail out nation members directly as opposed to lending the money straight to the banks. This is in opposition to IMF Chief Lagarde who was quoted as saying she prefers bypassing member states and working a situation similar to TARP. It’s been said that Hollande is at odds with Merkel as well.
Next page: Considering the Fed
So where are we heading into yet another Fed week? We find the Dollar on the decline and some of the risk on trying to recover. Oddly enough we also find the equity markets dropping along with the Greenback. When that happens odds are high we are in a trading range type market as they usually work inverse to each other. We’ll probably be all over the map again.
Overall, I think we’ve put in an important high last month. A high like that should spawn a multi-week to multi-month correction. We are already in for a month. I believe the fact that the intraday crash was totally retraced meant that it took some of the bears out of the market. They gave up too easily. On the flip side if there was margin selling that means they took some of the bulls out as well. I don’t see this peak as a long term top. However, nothing is stopping this market from continuing the kind of complex grind we’ve experienced lately. I do not think you’ll see the kind of whiplash we saw in October and November with the Dow up 300 one day, down 300 the next. 150 up and down is quite enough, thank you. We’ve become accustomed to the kind of bears we had from 07-09 and back to 2000-02 where the drop was very steady. There’s not a lot of people left in the market that remember the 70’s. That market was characterized as a rolling, complex grind that took a lot of time to complete as opposed to wiping everyone out in one fell swoop. The difference between what we are used to is a sharp drop that spills blood in the streets.
Fear runs rampant and the bear exhausts itself. On the other hand, grinding corrections build fear slowly and tend to give back some of the fear on the good days. Consequently, it takes forever to get the VIX back into the 30’s, a level we really need to get the bull rolling again. Instead we have a market that wastes a lot of time and the net result is it doesn’t create fear as much as it lulls everyone to indifference. By the time this market starts going back up again many people are going to get frustrated enough to consider that it’s not going up anytime soon. But if it were to do it now (go up to a new high) then we’d have to start the process all over again. What I’ve learned is they don’t ring a bell at the top; Apple is already down 10% so we are in midstream and we should continue to roll and grind along. For the President of the United States, his hopes are best served by this thing ending at least 30 days before the election.