I trust that everyone had a nice holiday is chipper and ready to go. U.S. markets still have not reversed even though Europe may have and if we consider them the leader, we could be in for some trouble. But let’s go back to the end of the week, which suddenly feels like a long time ago.
Consumer confidence rose from 73.8 to 76.3 as Americans felt a little better about hiring prospects but still remain concerned about defense spending cuts. But Friday Wal-Mart got hit as their sales figures were the worst in seven years. I don’t know that Wal-Mart is the new GM. As you’ll remember, as GM used to go so did America. What I’ve noticed from Wal-Mart is the pricing isn’t quite as good as it used to be, and the deals you find there can be found elsewhere as well. But anytime an important cog in the wheel of the economy has a huge number that it hasn’t seen in years, it’s a concern. So let’s take a look at the stock. The action on Friday left a lower tail so it could all be a tad bit overblown. You had the gap down but it’s not like it closed on the low. At the end of the month its 89 days off the high. It doesn’t look as bad as it feels.
What we need to watch for is the tail on this chart. If it’s going down, they’ll attack immediately to retest the low. If not the gap will get filled. These situations generally resolve one or the other fairly quick.
Last time we talked about the Justice Department’s suit against S&P. Wanna hear a joke? Moody’s lowered the rating on S&P. They are calling it near junk status. You want to tell me Moody’s isn’t in the same boat as S&P is as far as potential Justice Department action? I find the whole thing ridiculous because when it counted, none of the agencies were there to defend the public.
The surprise of the week was the Greenback which extended gains above the possible trend line for a bigger triangle which has contained the action since November. This opens the door for a move to the November high which is just above the 200dma. That being said there is greater risk to the stock market now then we’ve seen in many weeks. The other not so big surprise because it really shouldn’t surprise anyone was the drop in precious metals. This sector has been threatening a bigger drop for a long time but it just doesn’t happen. Last week it finally did. The best target I have for you is 2900 in Silver which is a Fibonacci extension of the leg down in January. The XAU has a very choppy leg down from September and nothing is certain there but we do know it’s coming to critical 2012 support and if that breaks we need to go to a monthly chart to get the next target near 130. The 200 month moving average is 116 so the reality of any real disaster has that level as a long term target. But at 143 it no longer seems so far-fetched. At the rate we are going it’s not likely to get tomorrow. But I will tell you that once the precious metals pick up steam it’s hard to get them to reverse, especially when you have the Greenback going the other way.
There’s a lot of noise right now concerning the big drop in the Yen contract. It’s reached the critical phase at 1.0600 which carries an important Fibonacci level among the legs. Don’t be surprised to see an important trading reversal right here. This one has become nearly as one way as it gets.
So where does that leave us? The markets are still in uptrends, nothing has changed there but Europe is in a bit of trouble. Even as the FTSE made a new high last week, it has dropped far enough to put in a secondary high that suggests a correction has started that will at least take the chart sideways. That last small degree leg up was a 5 wave completion and has confirmed it’s at least not ready to continue going up right now. Our concern is that US markets will follow suit. On the one hand that might not be so bad if it goes sideways because it would mean we’d dodge another bullet.
Next page: What's up with the VIX?
Finally, the VIX is back in the ditch. Given the Wal-Mart discussion it’s hard to fathom a VIX so low with the worries they have over WMT. I’ve heard some people discuss a 1987 style event. I think it’s feasible. Let’s keep in mind that 1987 came as a result of an extremely overbought market, it might have been a crash but in no shape or form did we have the kind of financial disaster that came in 2008. I’m on record at least a zillion times stating the VIX situation will resolve. It’s not a matter of if; it’s a matter of when. If it stubbornly won’t go peacefully, markets seem to have a way of compensating for that. A VIX at 13 can suddenly be at 25 in a week but not under normal circumstances. It would take a 1987 style event to make that happen. If it did happen we’d get a tremendous shake of the trees and that would be that. It would certainly shake up a few people but if 1987 is the true theme it will not cause much long term damage to this young secular bull market. I think the damage would come in more as a result of the fear of a serious breakout in the US Dollar.
So is a 1987 style event a given? Not at all but the higher this market goes without relief from the VIX the chances improve all the time something like it could materialize. The most important condition to watch for this week is going to be the European charts. Do they turn sideways or keep dropping? Right now this FTSE is still setup to go lower. Finally, the State of the Union speech meant we are back in a political season with the defense spending cuts ready to kick in really soon. It’s time to go on roller coaster watch. Remember the fiscal cliff and NHL lockout negotiations? How could you forget? We could have lots of twists and turns in the next week. Be careful.