Stock index price action key following bizarre week

Mini-crash on five-minute chart, other patterns highlight index strangeness

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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.

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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.

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