Like the Energizer Bunny, the market keeps ticking; ticking and then it lost Apple. The story of the week was Apple Computer, or the lack thereof. If you hang out on Twitter you get a feeling for what some traders are thinking and I have to tell you, it amazed me how many people were looking to go long just a couple of weeks back when it was trying to find a low. Normally, the bottom feeders come out of the woodwork and some of them actually bear fruit.
This time there was one major problem with that. Apple was running some close to perfect symmetry since it bottomed in 2009. First of all, the low it had in 2011 was 610 days off the bottom (all calculations +/-1-2). Then we had the recent bottom which was another 377 down the road, which actually meant we were at 377 and 987 at the same time. Normally, a time window like that spawns at least a nice trading leg. This one launched a pitiful bounce that dried up quickly and led to a violation of not only the time window but an important trend line as well. I was asked if you should go long. My reply was why not think about shorting a bounce? What’s wrong with that? I’ll tell you. AAPL, being the tech leader and darling that it was, certainly wasn’t viewed as anything that could get out of control. The right play was short and if you didn’t want to be short in the very least, get out of the way. It took the patience of a saint but on earnings day the stock finally hit the rocks.
But a really interesting thing happened. The VIX didn’t spike and the rest of the market was just fine for the most part. The market is moving on from AAPL in one sense but in another sense technology lost an important leader. If you think that doesn’t hurt, Apple is likely the reason the SPX stands at new highs and the Nasdaq/NDX does not. Think about your favorite sports team. If for some reason Washington loses RG III, how are they going to replace him at QB? They are not. You don’t replace that kind of leadership overnight and along the same lines an important index isn’t going to replace its lost leadership.
Now that the SPX has breached 1500, what are its capabilities? Last time we discussed the wedge working in the Dow and its possibility of hitting a new all-time high. Let’s look at the SPX. The first leg off the bottom is roughly 554 points. If we go to the 2011 high and consider that a big ABC then it’s about 704 points. If the 2010 pullback were to create a leg the same size as the first leg off the bottom, the SPX will end up at 1564. If that move off the bottom to 2011 spawns a .618 leg off the 2011 low we’ll end up at 1509. What does that mean? It means we could have a top this week under one interpretation and under the other scenario we still have some way to go. It’s not that it’s a more bullish aggressive tone, it’s just a matter of doing some calculating based on the size of the legs we already have. A common relationship you already know is the C leg being .618 of the A. None of us is exactly certain of a particular wave count because of the subjectivity of the Elliott Wave. But what we can do is start to work on all of the possibilities and start ruling out possibilities as we continue to take out resistance. I happen to like the 1564 interpretation because of the current VIX and the proximity 1564 is to absolute resistance. That extra 50 points could buy us another month or two and get us into the seasonal time of the year where stocks are less favored than they are now.
Another reason why I like the SPX 1564 scenario is I still think the NDX has more room on the upside. I have three relationships terminating in a range from 2829-2850. So if tech can do that, the SPX can get near its all-time high.
As a sidebar I’ve had some serious revelation I should be going back to our Fibonacci roots so while you’ve seen lots of Gann the past couple of years, we are going back to our roots. I’ve also received a revelation about how you ought to be trading using Fibonacci methods. A lot of Fibonacci people miss it, but we are going to start doing a lot of advanced Fibonacci work in our newsletters and with our training clients. There’s a trick to working with Fibonacci that makes it much more effective than most people realize. But I’ve noticed how well some of the past handful of market corrections have given us nearly perfect Fibonacci calculations in addition to what we’ve identified with the Square of 9 and/or the Gann price and time square.
So here we are with the bond market which had a very bad ending to the week as it made a small degree double top inside the gap that started the year. It had been projected to retest that gap one more time and failed miserably. Here’s the challenge; the wave count down from the November high is a perfect Fibonacci leg sequence for a 5 wave drop. That means you still don’t take for granted it will break down below the low but it’s not looking very good. If the SPX is going for 1564, chances are bonds break down again. If the SPX is headed for 1509 we could see an important reversal this week. But a breakdown here, which is a reasonable probability, can get the long bond down to the 134-36 level. Even if it does break down, that doesn’t mean the bull market is over. For the bull to be over, we’d need to see prices break below the 2011 or early 2012 low. Until then we have no real technical damage to the long term.
As far as gold is concerned the 2 legs off the top are close to equality which is why you can build at least somewhat of a case for an important bottom. By the top I don’t mean the absolute top, just the pattern we’ve been running since the October peak. If you want to look at the complete pattern from the real top in 2011, if any of these legs wants to extend lower we could end up a lot lower. But the condition with gold is the recent bounce has been really crummy even with the equality of legs and the 62 days off the high. But the intraday pattern on the precious metals is calling for a bounce attempt right now so we’ll see how kindly bears react to that.
Coming into the week we likely see a continuation of what we’ve seen recently. Look to the various alternative in the SPX as a guide. These should continue to impact the markets. The VIX problem is unresolved but as we know it may not impact the price action for weeks to several months. Just be sure you are not the last man standing at the game of musical chairs.
Click to enlarge.