The market refuses to quit. Last week at this time sentiment turned nasty right in the big time window on the Cyprus news. I don’t claim to understand all of the politics involved with the Russians, but the EU is setting a horrible precedent if they think they are going to bully one of their members into levying bank accounts of local citizens. I can understand the sentiment but at the end of the day, authorities and politicians are supposed to promote confidence in their financial markets. What the latest edict did was anything but that.
But in case you noticed, markets have not imploded even as the Gann Master Time window and the seasonal change point hit. Apparently markets seem intent on getting that test of the all-time high in the SPX. So why is this happening?
It gets back to the same old subject we’ve discussed here for the past year and a half. The Euro bears got burned really badly in the 2011 crisis and they haven’t been the same since. This group of traders who shorts every real or imagined crisis in Europe stays for a season and is content to take smaller profits. They really blew it in October because with the big time cycles where they were they could’ve pressed in and taken it a lot lower. But markets are not driven by fundamentals. Markets are driven by psychology. It takes some people a long time to learn that. Part of the reason for the longer term bull market is bears remain in hibernation most of the time.
But markets have topped this time of year 4 years running if it hasn’t been the exact day. So we’ll stay with our view that markets are going a lot higher in the longer term but are ripe to get hit in this season if not right now. Two of the most important charts I’ll be watching this week are Copper and the SSE. As you know the SSE had good symmetry at its recent peak and what usually happens is the price action will go further than most participants anticipate. However in this case the Shanghai Exchange turned back up with good short covering at the 38% retracement level which means we have a minimum requirement low. That doesn’t mean it’s the low. It looks interesting but if there’s no follow through what good will it be? What I’m trying to tell you for right now is one big candle doesn’t make a reversal. We need to see more information.
The SSE is important to Copper as they can go hand in hand. If we are looking to Copper as a larger degree triangle, it may have just broken down last week. There’s still good support below but let’s face it, Copper hasn’t exactly confirmed this rally in recent months. The trend/attractor line just broken goes back to October 2011. What concerns me is a triangle at this position in the pattern. It materialized after a drop in 2011 and we could be looking for a 5th wave down. If that’s the case we could get a move south of a little over 100 points. What that means is the market would get hit but it wouldn’t be the end of the world. You can see a move to roughly 260-280. A lot of that depends on what happens with the SSE. If this minimum correction fails I think Copper is going to break down. That really is the bottom line to my report this week. If Copper were to break down I have a hard time believing the equity market won’t follow suit.
The next chart that is extremely vulnerable to a turn is the BKX banking sector. We’ve been following it closely for the last 4 weeks and now it stands at 75 weeks off a bottom that had was down 76 weeks off its prior top. Banking is the most important chart and a case can be made the most vulnerable chart. The Dow Transports are also in a vulnerable spot although not quite as vulnerable as banking. The market is the market, a living, breathing mechanism but it’s also the sum of its component parts.
What comes first, the chicken or the egg? When the tide turns, it carries more than 80% of all boats. However if a market loses key leadership a rally can’t survive. If the market loses banking and transportation, it’s going to be done. On the other hand, we alerted clients the next day that AAPL had an interesting cluster of ratio and Gann readings at the recent bottom. In our ratio work the chart averaged 2.62 points per day at the same time the Gann Square of 9 had a factor of 6.09 (right at 610). AAPL is a chart that has been higher ever since we released those calculations. If you are wondering why technology is recovering or not falling apart, AAPL picked an interesting time to turn, right when other charts started peaking. Can markets pull back if AAPL stays afloat? I think only if it’s the BKX that’s doing the pulling back.
So that leaves us with one other area of investigation. What about those European charts themselves? After all, this is a Cyprus issue, isn’t it? European charts have provided good leadership for several months. I know the Chinese gain confidence from seeing a better Europe and if it tops here the likelihood of a 38% failure on the SSE grows exponentially. See how the markets are linked together. We have an excellent Gann square of 9 reading in the FTSE which is sufficient for a turn right now. In fact the DAX has an even better square of 9 reading.
Next page: A look at the charts
We’ve reached the rubber band is stretched phase. It’s the phase where it looks like this market is never going to decline. Think about the downtrends we’ve seen the last few years. We get a relentless move down, a bounce and then another move down and it feels like it’s never going to turn. Then it does. Looking at things on Sunday night it’s starting to have that feel. But we haven’t tested 1576 yet. Last week’s burst in the VIX was a 39% rise which created some time and allowed the bulls a little more fuel.
Even if it goes higher from here, with the VIX as low as it is, I doubt we could get a sustained push from here. Risk is extremely high.