Let us rewind the month back to the beginning of June when the surprise bounce commenced. At the time I told you to root for an early end because June is a pivotal month. With the seasonal time window at the Summer Solstice, we had the opportunity to find a lasting bottom to the correction that began with the peak in March. The flip side of that would be an extended bounce into the seasonal change point which would create a cycle inversion giving us a high instead of a low.
That appears to be the case as charts too numerous to mention lined up perfectly at one resistance point or another, creating a monster power bar on Thursday. It’s never easy when it comes to financial markets but rarely do charts line up at time and price resistance the way this one did. Usually we end up at time resistance but price is either too high or low. Other times we end up at perfectly price resistance but the timing isn’t right.
Everyone was focused on Greece and rightfully so, the Euro remains in danger of challenging the 1.2000 handle. But if we go back to the short covering rally from a week ago Thursday, the rumor mongers made it as abundantly clear as is their wont, that no matter what happened in the election last Sunday, they were going to implement some easing come Monday. As is usually the case Monday came and went with no action.
Could Thursday be a one day wonder where all of the selling materialized the same day? It’s possible; it’s just not very likely. For that I present you with 2 reasons. First of all, the Dollar gave us some perfect Gann symmetry. After a low back in Feb at 78.55, last week it found a bottom at 79 trading days. That’s really all you needed to know to get long last week or leverage yourself with the expectation that everything that moves inverse to the Greenback was going to do it. The other problem was the VIX which dropped like a rock, falling all the way to the 16 handle. After Thursday’s key acceleration the VIX actually dropped on Friday. For what reason on this planet I have no idea but it certainly is not a bullish omen to see the VIX move south even one tick after a monster day like Thursday.
So we have 2 reasons to be bearish if you needed anymore. Here’s my problem. I’d almost be willing to accept the fact that the move on Thursday was so big that everyone who wanted to sell that day did except for one thing. We are just not going to get a sustainable bull move with a VIX near 18. It is not going to happen. I’ve done a study of these exact kinds of bars coming off reversals at polarity and what usually happens is we get a 3-8 day consolidation to work off the suddenly extreme oversold condition before the next move south really kicks into gear.
Is there a mitigating condition? There’s only one. We’ve been following a megaphone trend which led to the recent drop this month. What we’ve found is that when the megaphone sets up like this one did; the expected drop is fairly reliable. In this case there was no disappointment but in one day prices rallied all the way back to the megaphone line. Unless the pattern is repelled there, the risk on trade is going to be off, the Dollar rally from May 2011 will resume and the equity bounce for June will be history. Those of you who closely follow my work know that when we see symmetry like we do on this Dollar chart, the resulting pattern usually goes much further than even the most optimistic minds can imagine. I’ll give you 2 examples. Last year the BTK topped on May 13 at 1514 and bottomed around December 1 at 1001. What was the range? The same number of points as the date of the peak (513). All you need to do is look at a chart of the BTK to know it led the explosive Santa Claus rally and wonderful move in technology into this year. The other example we’ve discussed numerous times. The Dow range for the bear market into 2009 was 7728 points. As we know, the QE2 rally in September 2010 kicked off some 77 weeks after the March 09 bottom. These kinds of conditions repeat over and over and lend themselves to explosive moves. In this case, the best thing I can tell you about the Greenback symmetry is its ONLY on a daily chart and not weekly. If the Greenback turned back up on weekly calculations the market would be sunk. Thankfully and perhaps mercifully this one is only on a daily time frame. We’ve been projecting a Greenback move into the mid 80’s. It got one third of the way there in one day.
So we go back to the same hypothesis and condition from the beginning of the month. This is still a market with shaky support given the uneven state of bears not willing to commit to positions lower than last October’s turning point. That still might be the case but I have one thing to tell you about that. Last year’s drop came down the area of the pullback after the April 2010 peak. That level represents fund managers and others who bought the first half of this bull market. Those people are likely still holding and as long as they don’t give up the October lows can be defended. If for whatever reason those people give up the market is going to be in serious trouble.
Next page: Other critical factors
A couple of sidebars worth mentioning. As the seasonal change point can be one of the key pivotal turns of the year, this can’t be good for the incumbent trying to get another 4 years. A loose estimate suggests that the President needs to see the market bottom 60 days before the election to have a chance. Think about this, even with a VIX near 18 the newsfeed is mostly negative from one day to the next. If it’s not Facebook, it’s JP Morgan. If not Morgan its Greece. If not Greece its Spain. If not Spain it’s the unemployment rate or the fact that Congress shows little interest in doing anything. If not Congress it’s the Fed pushing on a string. If it’s not that, then we can talk about the new perceived Islamic threat in Egypt which may or may not choose to turn back the clock on Israel to the days before the Camp David Accord. With all this bad news, why won’t the markets bottom? Simply put the intermediate term trading sentiment does not match the long term gloom. With a newsfeed like this, imagine what fear levels would be like and what news event might materialize to actually get the VIX up to 30. To be honest with you, I don’t even want to think about it. But unfortunately we probably have to find out in order to get a true market bottom. I’m only the messenger and would much rather write something bullish.
My goal next week is to have some good news for you. Maybe the Dollar will be repelled at the megaphone. It would be nice.
Click chart to enlarge