Even bigger news coming out of Egypt is Morsi establishing broad powers for himself. He is now considered to be more powerful than Mubarak ever was. Right now he’s using that power for good as he brokered the truce. The Egyptian people are not too pleased as protests broke out all over the place. Let’s take this one step at a time. He’s establishing the dictatorship right now because of opposition to his desire to maintain the status quo for power. What that means is he’s keeping the original peace treaty with Israel which has been in place since the Camp David Accord with Jimmy Carter. Not only that, I think he needs that military aid he gets from the US every year. The money trail leads to the US.
So why would someone who represents the Muslim Brotherhood support a truce with Israel? I’ve heard a Morsi speech where he claimed they wouldn’t stop until they made Jerusalem the capital of a Pan Arabic state. Why play peacemaker? It’s one of 2 roads. Either his long term goal really is to stay in power for the next 30 years and take US money and be the next Western puppet. The other alternative is he knows that Egypt is not ready to pursue a larger some kind of Islamic empire at the present time and intends to build up his economy and army much the way Hitler did back in the 30’s. Hitler came in at the beginning preaching status quo and peace for Europe as well. This is the dictator playbook he is following. I find it hard to believe he does want long term peace with Israel but I do believe he is trying to lull his enemies into a longer term complacency. Remember, he’s not there on a 4 year term. This guy has all the time in the world. He seems to be really smart and the best of them spend their early years keeping their friends close but their enemies closer. In the meantime he keeps American aid coming.
Since this week’s theme is holiday miracles I really want to come here and tell you that Morsi really is playing bait and switch with his own constituency and plans to work with the US and Israel for the long term but a deeper view of 20th century history has me very skeptical. We are spending this much time on it because it really is the most important story of the week.
It’s interesting to note that oil never rallied during the time Israel and Hamas lobbed rockets at each other. At the beginning traders were fixated on demand destruction from the super storm while the only time oil prices elevated was on the theory the government would come up with its Christmas miracle and avoid going over the cliff. The lesson here is you can’t automatically assume what oil is going to do based on conventional wisdom. If the last 3 years have taught us anything, oil is going to run based on the sentiment of the stock market.
Technically, the next big story is the US Dollar which put in a perfect 1.618 extension of the first wave off the low and reversed to within a penny of my Fibonacci projection and now is to the point where it has no more margin for error if this is still an uptrend by virtue of the Elliott 4th wave overlap rule. It has to recover now or we run the risk of going all the way back down.
This chart shows you just how critical this level of support really is. We are at the A wave tendency line or it might be a 1st wave up. But it can’t drop anymore. Not only that but it’s in danger of violating the Andrews channel so there’s 2 reasons for concern. But if you remember last year the Santa Claus rally came in waves. There was an interruption in the middle of December before the rally continued. You’ll remember that on December 1st the big rally kicked off because the BTK biotech index had a range of 514 after it had peaked on 5/14 of 2011. I can’t be that bullish this time around. If you remember the VIX was way up there as it was in the high 30’s last November after peaking at 48 in October and 46 in October. This year’s version can’t even crack 20. Then again, this rally has kicked in early. I don’t think it goes straight up to Christmas and what the Dollar is telling us is it decides to make a stand right here, the rally in stocks will have a tough week and make a charge at retesting the bottom. The point being we don’t have the kind of bullish setup we had a year ago and we are lucky to have the seasonal factors supporting a rally at all.
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Here’s an update on my book. Those of you who have Breakthrough Strategies might know the original inspiration for that book was to teachpeople who used lagging indicators like a MACD how to properly align it with market timing work. I did the book because too many people were using bad signals from the MACD and shorted the market in 2005 and 06 and got crushed. So while are being true to original edition and keeping most of the MACD work in there, this edition takes it one step further and shows the intermediate level trader how to grow beyond lagging indicators into the pure pattern recognition of support/resistance and Gann symmetry. Since we started taking people from a pure lagging indicator standpoint and introduced market timing to many who didn’t know market could be timed the new edition has the goal of introducing people to life beyond lagging indicators altogether. Plus we discuss psychology and sentiment.
When you see the NASDAQ turning at a range of 386 in 38 days, you don’t need a MACD to tell you a turn is at hand.
At the end of the day when we put all of this together I think this low is better than some people think it is but not as good as others hope it might be. I can’t get too bullish on a big leg when the VIX represents what normally should be a market top. Something isn’t right but it isn’t likely to manifest over the holidays. I’m concerned about what happens in January. But for now have a very blessed holiday season.