I told you the market didn’t like the new French President. As expected Mr. Hollande won under a platform rejecting austerity. As conditions developed it appeared we had a sell the rumor buy the news event but it appears we are about to get a retest of that very same bottom of only 2 weeks ago in the CAC. A double buy the news event? We’ll see, but based on the turn of events from last week markets are looking for any excuse to sell right now.
As an interesting aside, I don’t believe any prosperity ever comes from austerity and this could be another case of Euro equity bears attempting to shoot for the moon but somewhere down the road have it blow up in the face like it did last year. I’m not so much interested in what happens on Monday as I am on Tuesday. While all of this is materializing, the Chinese SSE is back to the top of the range. Are you confused yet?
Make no mistake, markets are in a grinding corrective mode for the past month and a half no matter what the Dow or BTK tells you. Apple computer had a moment in the sun but has done absolutely nothing since then. Realize the NBA market (Nothing But Apple) takes notice as the SOX is also retesting its Apple inspired spike. If Apple isn’t going to go, it will fail to inspire confidence in the rest of technology. So not only is Apple properly weighted to impact the NDX, it has a psychological factor attached that creates or denies momentum similar to that of the Stanley Cup Playoffs. Right now the momentum is going the other way.
Readers of this space know the main culprit is the VIX. We corrected for an entire month yet made very little net progress toward fear and respectability. Bear phases generally last until they wipe complacency as well as the smiles off traders’ mugs. A month of grind didn’t even net us a sustained reading over 20. My biggest concern was the month was wasted because even if we set a new high (which we did in the Dow) it would do no good as far as sustaining the move. We need a minimum level of 20 to create a trading leg up that can retest the top of the range and we probably need a VIX closer to 30 to end this bearish phase altogether. As I write this, the NQ already has a new low for the entire correction which means the first month was indeed a waste.
If there is a positive takeaway, looking at all of the events since Thursday it does appear that sentiment is getting thick enough to turn the markets back up just at the point in time bears are starting to get comfortable. Now that the reality of first new Socialist government in France since the 80’s has materialized we’ll see just how resolute Euro bears really are.
A quick look at the Greenback also shows us a big trading range as the pattern is about to retest a double high from early April. One of the big tests of this week will be determined by the US Dollar’s ability to break through the 80.35 handle. As bullish as the near term pattern looks right now we all know we could be looking at an entirely different picture come Tuesday.
So when we boil this down, what is likely to be the high probability event for the week? If you haven’t checked out my new article in the May issue of this magazine you should look at the research of my latest Gann installment. But my next article scheduled for July is about support and resistance levels. When patterns take out old highs sooner or later they come back to retest them. This one wasted a whole month but it appears that the test of the 2011 high and the corresponding test of polarity is inevitable. But realize this correction does not materialize any technical damage until it breaks through that ridge of support.
We could very easily achieve this test by Monday or Tuesday. Depending how much fear comes into the market that could be it for right now. In the bigger picture, the final low might not be achieved until we get back down near the April 2010 peak which is a little over 400 points from where we are right now. That would be another 14% and a grand total of 19% off the top. If that happened this bearish phase would accomplish getting back to the breakout point from right after Christmas.
Next page: Where Apple may go
But aren’t we still looking at the NBA market? In the near term Apple has a ridge near 547 but in the bigger picture there’s a lot of support around the 427 level. I don’t anticipate Apple getting there now but a move down there would be a 33% drop off the high. By the time bearish phases do their damage individual stocks suffer much more than do the major averages.
So by the time this is all over, we have a couple of realistic targets not only for technology but the most important market leader as well. Keep in mind this is just a hypothesis given the information we have right now. The reality of the situation is going to depend upon our friend the VIX. Corrections don’t have to hit any particular target in any given point in time. It all depends on whether fear builds over time. We can be at 30 in 2 weeks or it can take another 3 months. The challenge for bulls to hang in there has been on the good days. The bullish days have been nearly happy and unwound whatever respect was building on the down days.
If there is any upside all of this it’s the oil market. Prices are back down in the mid 90’s which should amount to a mini tax decrease on the American consumer as we see relief coming into the beginning of the summer driving season. I almost forgot, the jobs number was only 115K and clearly the focus for traders is demand destruction because the market is in one of its bearish phases. It would be nice to see oil level off when the market goes up but the catch 22 is the only time we do see relief at the pump is when the market turns the other way. It’s a case of heads I win and tails you lose. We all want to see the recovery pick up steam and give everyone a job who wants one. However, when the market goes up which signifies a better economy gas prices piggyback along for the ride. It seems like the only time we get relief at the pump is when bulls rein in their horns. When the market bottomed in 2009, the Circle K down the street from me was $1.61.
Recently, I saw prices hit $4.20 and I know other parts of the country got hit worse. I certainly don’t like 4.20 but if wouldn’t ever want to see 1.61 again if it meant the economy has to come unglued to get there. At the rate we are going, I suspect the equity market should get some kind of a climax to this leg down this week.