Let’s face it, it was a tough week. We started out last Sunday night with the European traders sniffing the laughing gas based on Monti’s comments from the prior Thursday. Not this past Thursday but a week ago Thursday. That’s where we have to go to put last week’s action in context. More late bears covered and markets were up on Sunday night as most Americans were hitting the BBQ or lake. But they weeded out the gains as the week progressed. They could never rally it and by Tuesday morning, early bears most likely added to already winning positions.
Personally, it didn’t surprise me one bit. What surprised me was how they kept support floating until Thursday/Friday. Luckily bears are not nearly as unified as they could be or have been in past bear markets. This is why it’s so important to understand market psychology and see who is wrong. That being said they still had the worst day of the year as all of the gains are gone.
That being said, they are unified but not like '01 or 08. If you were around for the Internet bear market the only time shorts covered was when Greenspan started lowering interest rates. Rumor and innuendo didn’t move anybody. The 2008 market speaks for itself.
Now we have the first hint of REAL technical damage as the high from October and the 200dma was breached on this SPX chart. It’s an area we hoped would not get breached. What does this mean? It means the people who bought this wonderful rally we had after Christmas are gone. That’s not a good thing. Now we are down to the challenge of what we faced back in the days of the 2011 European crisis and debt ceiling debacle. Back then we had a lot of intraday traders and bears who took turns establishing shorts and quickly covering them. That’s the bad news. The good news it’s a level on the charts where bears exhibited LESS CONVICTION. That means there’s a chance they’ll do the same thing again. At the end of the day, this is an area once again sitting above the people who bought the first part of this rally back in 2009 up to April 2010. The last time we discussed this was around Christmas time. As long as THOSE people don’t panic, the markets will come through this. We are not there yet but aside from all the talk of valuations and technical levels markets are emotionally driven and will be okay unless the people who are holding the first half of this rally get threatened. It will be the theme of June.
That ought to accelerate the VIX. I know how I feel about it. Luckily we are close to a seasonal change point and not only is it June 21 but we are about to hit the 6/18 date which also can influence major reversals. At least there was no Facebook excitement on this round of damage. This time the VIX hit the high for this correction, it’s on its way. If there is anything good to take from last week’s action is any good days we have are not likely to throw the meter back down to 21. We’ve been winding and grinding for a little over 2 months and the reason it’s not over are those bouts of complacency. Simply put, when the market is going up, they climb a wall of worry; something scares the weak hands and within a day or 2 sentiment gets thick enough to bring more people in. But markets are not climbing a wall of worry, just the opposite. Every time we’ve had complacency its put a ceiling on the bounce without fail. So now we are within striking distance of 30 and also within striking distance of one of the important seasonal change points for the year.
Here’s the next thing we need to watch in terms of our cycle work. Remember in early March we had what amounted to the beginning of a pullback. What I told you at that time was if the pullback could’ve lasted into the March 21 time window, we could have inverted the cycle and had a low instead of a high. It happened in 2011 where we peaked in February and the Japanese tsunami sequence ended around March 18 and gave us a low which inspired the next rally into May. That’s another story because it ended exactly at the point of the euphoria with the death of Osama Bin Laden. So you can begin to appreciate how much euphoria/complacency is the enemy of the bull. This March, the pullback only lasted a few days and we continued on and instead of inverting, we got the extreme scenario and peaked near the Gann/seasonal change point and the rest is history.
Now we are told to watch out for stimulus because the economy created 69,000 jobs in the latest report. You don’t need to hear from me that it’s one of the biggest outrages of the year. So the key issue is whether we get a serious bounce this week or do we start a bottoming process that could potentially turn markets back up close to the Summer Solstice. My problem is that while we need the bounce now almost desperately, I don’t want to see an inversion high fail on June 18. We have the Greek election coming up then but I think markets might get diverted into worrying about an Egyptian election also coming up in a couple of weeks. So putting the news stories aside which at best are symptoms of the problem anyway probably the best case scenario would be the exact opposite of March. We get a few key timed relief one or two day bounces in each of the next 2 weeks and work towards a more meaningful bottom after the middle of the month. This is not a prediction, its right out of the Bull Playbook. Whether Mr. Bull gets tossed a curveball is an entirely different story. Oddly enough, I think Mr. Bear’s playbook wouldn’t mind some complacency to fuel his profit potential even more.
Next page: Copper's role
I have another chart for you. This is the daily action of the weekly continuation of the Copper. I’m showing you the daily version so you can appreciate the finer detail that goes missing if I only show you weekly bars. This is what the longer term players are thinking. This sequence covers last year’s low to this year’s high and back. What is so devastating about this chart is that if look at A where you can make a case for short covering on the first sequence off the low, you can see that the end of the rally was a consolidation just above A. What that means is polarity tried to flip where former resistance could’ve become support. The tragedy is that it failed. So the buyers who came in January are gone. Now all that’s left is an area of short covering. The difference between a chart like Copper and the SPX is Copper never took out its 2011 high like equities. What that means is you can build a case we are still in the same bear market in Copper since the 2011 high. The only thing holding us up at this point is a vacuum not of buyers but where sellers declared their intention of taking profits. The likely outcome here is Copper traces all the way down to the 300 area. The 200 week moving average on this chart is 321 so that’s a given.
So maybe that’s for the best given if we can get a bounce going this week, it could bounce off 321, hold on a few days and perhaps make a serious low after the 15th when the VIX is likely to be on the cusp of nosebleed territory.
There’s a lot at stake, this time it happens to be the future of the country. When we get employment numbers like these 3.5 years into a Presidency, odds increase that management fires the coach. As a social observer, if the market for whatever reason bottoms in June the incumbent still has enough to recover. But if the market stays bad throughout the entire convention season I think they will change the coach.
Click charts to enlarge