Key technical action highlights upcoming week for stocks

Fibonacci Forecaster Weekend Review & Preview

Stock index, chart, technical analysis Stock index, chart, technical analysis

The DAX came out of the gate and respected not only its high but the Dow high from the prior Friday. Markets had a lot of trouble last week as something does appear to be working with our big 260-week window. On the Oct. 11, the actual anniversary date, they tried bouncing early but failed late.

Did you see the Gallup polling data on Saturday? It’s the first time Romney has led since the candidates were deadlocked prior to the conventions. If Romney wins, it will be a huge upset considering the long odds I described in the past couple of updates. Obama likely comes out with the fight of his life, but it probably won’t amount to a hill of beans if the market keeps dropping. If the market keeps dropping, we know it’s because of the time element, but in the bigger picture it’s just the luck of the draw. Look at the Yankees. If they somehow win or lose that game vs. Detroit in the ninth inning, Derek Jeter doesn’t break his leg. That’s bad luck. If Obama loses this election because of a 260-week window that turned the market, it certainly will be because of universal market principles. But it will also be the luck of the draw; the election just so happened to come after the turn and not before it.

We have some major technical action this week. The SPX came down to what I call the high before the high support zone at 1426 and held. It’s an important level in the near term. But in a bigger sense, it’s testing the April high at 1422. Violations now mean something bigger is happening. The NDX has already created a serious breach not only of the high before the high but the March high. Friday was also a day the banks finally decided to stop fighting the tide. Once the banks join in, its time to take all of this very seriously.

If there is a surprise on the week, it’s the sudden resurrection of the Greenback which looked down and out on the day the Dow topped but set a new sequence high last week and is close to breaking through. But getting back to the NDX, it’s starting to look like it wants to at least make a run to the next high before the high near 2660. It's only about 60 points, but it would represent the most technical damage since the period after the March peak. The bottom line is I take this change of direction seriously, but the more interesting question concerns the timing windows. Because the Dow peaked in the beginning of the window and other markets topped even earlier, is it possible for us to have a low at the end of the time windows near the end of the month?

I can’t rule it out but once again it should be driven by the VIX. Thursday was a day where the VIX dropped with the bounce attempt early in the day but didn’t rise as the gains were given back. There is still an element of complacency out there, and the bear’s best friend is complacency. We spent weeks if not months discussing whether we’d get a high or low in October and answer was driven by the VIX level. So unless we get some fear coming into this market fairly soon you can forget about a high and low in this cycle. We are going to end up with a high exclusively. We’ll be lucky if this doesn’t turn into some serious technical damage down the road. Slowly as the days wore on last week I found myself looking for excuses to favor the bears. As you know I’ve been fairly bullish the past few years and really the only thing that changes me is a time window reversal. Once that happens I stop giving the benefit of the doubt to the bulls and start looking for reasons to give the benefit of the doubt to bears. What I’ve found thus far on an intraday basis is every time the Emini comes to an intraday inflection point it falls apart. Even on the better bounces it doesn’t hit anything one would call an optimistic projection based on the pattern. At one point last week the NQ had 2 legs down off the high and each was approximately 110 points. That was Tuesday night and one would have expected a bigger bounce attempt but it fell like warm butter on Wednesday. These kinds of conditions don’t happen in strong bull markets.

We are in the trickiest and most dangerous part of all financial markets and a place where a lot of intermediate level traders not lose money but give back a lot of gains made in bull phases. Fund managers make the same mistakes. One guest on CNBC was projecting SPX 1600 by the end of the year! The problem is many people don’t even understand why a market changes direction let alone recognizing the potential when it starts to turn. We are in a condition right now where an important time window has fired off right on schedule but we don’t have enough information to confirm it technically. By the time that happens, it’s too late. The money is already lost. So the best thing to do here is play close attention to market behavior. Right now we are tracing out lower highs and in some cases lower lows. But it you look at various sectors and I’ll highlight the SOX, we have a lot of the market that has already been beat up real good. With this type of bearish behavior it’s amazing that a lot of people are overlooking the recent action and still believe it will go higher. I guess they really don’t ring bells at the top.

The really dangerous part here is that the market can still turn up. But look at how it behaved last week. We haven’t seen these charts behaving so poorly at any time since March. The part that concerns me here is that our time window brought out the European rumor mongers and for once they might have a trade on their hands. Since most of those people don’t know time cycles they might not even realize it yet thus giving us our complacency readings on the VIX. But I’ll take this one step at a time. I told you to pay careful attention to how the DAX came out of the chute, it dropped so now the idea is to see what the SPX does on Monday and beyond that when the inevitable bounce does materialize, what will the behavior and characteristics be?

Next page: The role of politics

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