Stock index, chart, technical analysis
An African American is being inaugurated President on Martin Luther King Day. Americans should never be complacent about that. This President certainly isn’t going to have it easy as the first fight of the year is the debt ceiling where the GOP has fired the first shot for a three-month extension. We are not going to get into a blow by blow, but we are going to follow whether the bears play volleyball on each twist and turn.
There’s been a lot of noise coming out of the gold market as people seem to think it's set to rally. I’m not as sure as every turn higher is greeted with hope and optimism. A bull would prefer a stealth move. It’s off to a decent start up but has serious resistance to about $1,720 and it’s not a given that it will break through. The Greenback is also attempting a breakthrough, so both of them are not likely to do it. So if gold and the dollar are in a stalemate, which is going to play tiebreaker?
Perhaps the chart of the week comes from Europe. As we know the European indexes have been leading to the upside and given us an important violation of the October time windows, which has led to breakthrough for not only the Russell 2000 but last week the SPX that is at a post-financial crash high. It’s an important signpost if you are considering the new secular bull market case. But Germany had a tough week. Overall, Europe looks decent except for Germany, which for whatever reason is flat and it has made some people nervous. The economy shrank by 0.5% after a meager gain of 0.7% the quarter before, which means GDP for the whole year was just 0.7%. But the DAX was flat while the FTSE and CAC made new highs. The week started out good, so we can expect more of the same over here. While we are looking at numbers here’s what’s happening on our side of the pond.
Consumer sentiment came in at 71.3 as opposed to 72.9 from the month before; this is the lowest reading in a year. The Philly Fed numbers for the Mid-Atlantic region really dropped from 4.6 to -5.8. But the market didn’t get hit. These are the lousiest numbers we’ve had in a while but the stock market doesn’t represent it. The reason for these numbers is blamed on the Fiscal Cliff negotiations, which hampered confidence.
And these markets are at new highs? Folks, I have to tell you that if these markets are at new highs with such terrible numbers that could only mean one of two things. First, it means we are climbing a wall of worry and the better economic times are six months out because the market is an economic leading indicator. However, what concerns me is the paltry German number after a good market year. True, we are a year out of an extreme crisis and these numbers reflect the pullback in April and May, not to mention the 4th quarter of 2011. But one would think the numbers should be better. So the United States and Europe each have different issues but similar results when it comes to economic numbers.
With such lousy numbers we have another breakdown in the VIX. That’s the strangest thing I’ve ever seen. However, the truth of the matter is a plummeting VIX doesn’t necessarily mean a market top right now, but eventually it will. In 2006-07 it took 7-9 months. So we are looking at the FTSE, the VIX and also the SPX. It has a very interesting calculation. What was the range of the bear market? From 1576-666 that’s about 910 points, right? Okay, so then we take 1.618*910 we get 1472. What was the high in September? It was 1474, which is close enough. That’s why the SPX topped where it did. Now it has violated that relationship and it’s done it by more than a few points. So my take on things is everyday this goes up, stays higher and generally leaves 1472-4 in the rear view mirror is just one more nail in the coffin to the old bear market. What does that say to the experts who let their opinions be driven by the Fed? Well, they aren’t traders and we only care about what’s on the chart. People have been scoffing at this rally for nearly four years, but that doesn’t change the fact we have any number of great calculations at the 2009 bottom. We are being tested again and every day the market doesn’t drop is another bit of new information that helps us understand that 2009 is a generational bottom. More and more people are starting to get on board with that view, which means we are likely getting late if the VIX wasn’t already telling us that.
They’ve come to the conclusion that after years of the market not dropping it starts to become obvious. If it’s starting to become obvious, we could be close to what the Elliotticians call the point of recognition, which is about halfway through the move. That doesn’t mean we can’t get a real shake out where the nuts and coconuts fall out. Shorter shakeouts could happen at any time. Given where we are in the SPX and the FTSE we could be really close to one of those. We’ll be judging this market really careful once it gets a little higher at resistance, which should happen this week.
The Dow is also sitting in a potential wedge formation that wouldn’t have much further to go. It probably has another 600 points to go before it hits serious Fibonacci resistance. That would mean we can still see a new all-time high right in this sequence. None of this surprises us here at Lucas Wave. This is the kind of pattern that can get there in three days or three months. Three months is more likely. What the Dow is telling us is we could see an important high sooner as opposed to later. January has worked out better than I thought it would. If this wedge is real, then it could be telling us we could be in for a rough ride in the new legislative season in Washington.
