Markets got drubbed last week. But that’s not the story as much as the NQ tested its low on 2 occasions, reversed and could not sustain the move off the low. It looked for all practical purposes that Friday could be the day but a late day swoon ended that notion. Someone said it was irrational short covering and from where we sit now that’s what it looks like. From where I sit, what needs to rally hasn’t, and what could break down, might. Perhaps the most intriguing chart of the week is the long term US Dollar below which held the intermediate term Andrews pitchfork without breaking down. If we are to leverage that chart chances are good the risk on will be taking another break next week just at the point it could be finding a low and the stock market could break free from current support levels. For the markets to come back, we needed to see Andrews get violated here and instead turned back up.
In the commodity charts, the grains complex shows the greatest potential to break down as we’ve discussed a head and shoulders type peak in Corn over the past year. But it still has a triple bottom layer of support just below so we are not there yet. But Corn is very close to breaking free. The action is pitiful. It’s not setting up good because it should’ve bounced by now. Corn is similar to the XAU which had multiple lows over the past few months and if it was going higher, would have done so by now. I discussed this very same condition for the XAU several weeks back and we see what happened. It broke down.
In the category of what should’ve rallied by now we have the NQ representing the equity market. Early in the day we had that crazy short covering bounce and it looked to the entire world that after several shots at the low it was finally going to break through. Late Friday after a pullback of about an hour off the high of the day an intraday double low tried to bounce but absolutely failed.
Next page: China's role
China isn’t helping as you see. There’s no problem there. It had a wonderful bounce/trading leg and got back to the high which suggested we are in the larger trading range I’ve been discussing since March. So it’s no shame if it can’t break through now.
Why do I think the NQ and the rest sold into the close?
The biggest problem, which is an ongoing problem, is on the VIX which finally made it over 21 last week but with the horrid action AND the Morgan scandal backed off the high. They gave the Morgan news some respect but on Friday morning they shrugged it off and instead of selling, they covered. You know what that means? Here’s the way Wall Street is looking at it: Okay, JP Morgan is huge, they made a bad trade but they have plenty of assets and the government doesn’t need to bail them out. Losing a billion here or there is no big deal. That’s complacency which is now dyed in the wool. Think about this for a minute. Those of us in the general public have a hard time relating to our favorite movie stars and sports heroes who make about 1-20 million a year, right?
They make a lot of money and we barely can comprehend how they get paid the way they do because we are just a bunch of working stiffs who will never see that kind of money. But it’s all good because that’s the market value. You love your movies and I love my NY Rangers. I don’t care how much they make as long as they win.
Okay. Now look at what they just paid for the LA Dodgers. A group headed by Magic Johnson who happens to be a great businessman just paid $2 billion for the whole franchise. And these guys burn through this money in 6 weeks? This is billions, not millions.
On Friday you saw a market that initially shrugged it off as business as usual. That’s not okay.
Well, someone started selling again on Friday afternoon. The longer we meander around below 20 it adds fuel and life to the correction. It’s an ongoing theme we discuss here every single week. So if you are sitting back and wondering where the true bottom is and whether we could possibly be there what you need to do is look at other bottoms that produced big time legs in the market and you’ll swiftly come to the conclusion fear levels are nowhere near where they need to be to pull that off right now.
Please understand that while I might have my personal opinions on this topic my personal opinion has nothing to do with the direction of the market. I am strictly looking at what fuels bulls and bears. I am looking at fear, greed, complacency and denial. The first reaction to the JP Morgan situation was not bulls selling on fear but bears buying on fear. They mistakenly took the event as an excuse to get out of their positions because they were wrong in the notion that a VIX near 20 spelled enough fear they shouldn’t be short anymore. I don’t have the problem there as much as the fact bulls were complacent enough to believe the same thing. $2 billion dollars in 6 weeks is a big deal, especially when the same company complains bitterly about having to pay $500 million due to the regulations caused by Dodd-Frank. As Barney Frank put it, (I’m paraphrasing) they just lost 4-5 times that much on one trade. All politics aside, the appropriate response would have been a market down big below support with fear thick enough you can cut it with a knife coming through the television. And why not? In bull phases they worry about much less and corrections end in a day or 2.
At the end of the day, what they do speaks volumes to the fortunes of the market. This correction, bear phase or whatever you want to call it isn’t going to end until we get some type of end of the world feel to it whether its deserved or not. You saw what happened last year. It took a tsunami in Japan to end one correction and it took the scare of a real European meltdown to end another.
On Sunday, the austerity movement in Europe was dealt another blow as Merkel’s conservatives in the North Rhine-Westphalia state suffered a major defeat by the leftist opposition. The Social Democrats won 38.9% of the vote and now will have enough of a voice to pressure Merkel to change her stance from pure austerity to a more balanced growth agenda for the Southern European states. Once again, all politics aside, this could lead to a sentiment where Euro equity bears build a case against the same Keynesian style approach used by Geithner/Bernanke. We could see initial fear levels rise and in a repeat of last year, bears exhaust themselves. This scenario is purely hypothetical but the point being some invent has to trigger complacency to turn into fear.
This is an incredibly important week as various charts test important support levels as we either maintain the trading range or take this correction to the next level.