It’s the point of inflection after the shake of the trees. That’s all you need to know, see you next week!
OK, after a halfhearted attempt the week before, we finally had the sequence where they shook the trees and all the nuts and coconuts fell out. There are weak hands, profit takers and probably a few early bears. What I’ve been looking for is a sequence that sucks in the remainder of the skeptics. As you know, for the high I’m looking for the opposite of what we had on June 24. What that means is we look for happiness and euphoria with a falling VIX, then a reversal down and finally a move back up that makes everyone think the only way the market can go is up. I thought we might have had that shake a week ago but the market came up with an even better shake last week.
The most interesting aspect of last week’s high wasn’t the Cisco layoff, although that is notable. It wasn’t the Philly Fed number, although that was notable as well. The Philly Fed number came in at 9.3 after being at 19.8 the month before. I don’t know which is worse, the actual number or the economists being so wrong because they were looking for 15. That August number is indicative of people getting a just a little nervous about the impending budget showdown, but we are going to leave that alone this week. I’m probably going to bend your ear about it for a whole month down the road.
The most interesting aspect of the high is it came in at 1,619 calendar days off the March 9, 2009, Haines bottom right on schedule. My only problem is we don’t normally get tops in August. I think it was Bob Pisani who commented last week about how light the volume was and the next two weeks should be just as light. We are entering a period where the few can push around the many. I still suspect we could see another high in the market, but I also suspect that something topped last week. We won’t know what it was until we look at it in retrospect. I’m sure you remember the Russell 2000 peaked in July in 2007 while the rest of the market surged one more time and we didn’t know the Russell peaked until its retest of the high failed. So now we enter the next phase of time window season as we hit 232 weeks off the 09 bottom and we come close to 161 months off the Internet bubble top. We are actually there and today at 161.3 months off the top and will be 161.8 months off the top exactly on September 2nd. That means the real center of this time window is Labor Day weekend. You can see why I’m concerned this peak is a couple of weeks early. At that point we’ll also be 233 weeks off the 09 low.
So let’s talk about Cisco. In the past, the perverted mechanism the market is usually rallies on a layoff. The message being sent is efficiency which helps earnings so it’s very curious to see the reaction based on this event. The market was looking for an excuse to sell and picked an event it normally likes to rally on. That can’t be a good sign. It’s telling me based on the information we have up to this point that my hypothesis for a high this time of year is at least in the ballpark. I’m not going to come here and tell you the market is 100% topping because it’s not my job. My job is to tell you that conditions are becoming extremely ripe for at least an intermediate level correction at any time going forward. The difference between us and everyone else is based on our timing work I was able to tell you this 3 months ago. Now it’s lining up for the 2nd straight year exactly like I wouldn’t want it to. Last year we had the election which was the added wild card because we came really close to being able to handicap the race based on what the market was doing. Last year we had that 5 year 261 week condition and I was not so secretly hoping for a low but ended up with the high. It just so happened the correction was a dud. That’s what happens in secular bull markets. So here we are the 2nd year in a row with the high.
So they sold it this week and here’s what it looks like for right now.
Here’s a little Elliott for you. As you can see, from the June low it’s possible we have a 3 wave sequence up although it’s also possible it’s a 5. The bottom line is we dropped down to what we all can agree on would be the top of the 1st wave. That means we are sitting at the 4th wave overlap area. That’s what makes this an inflection point. If this is a 4th wave in a 5 wave sequence up it will reverse back up starting on Monday. It’s very simple, if this level is violated we no longer have to be concerned about the condition and then we start thinking about a bigger correction.
You should know there is already at least one important chart that has invalidated the 1618 day window. There is a chart that made a new high on Friday. It’s the CAC and that opens up a whole new can of worms. If you’ve following the events in Europe, the FTSE is very questionable while the DAX is somewhat neutral while it’s the CAC leading to the upside. But if one chart can invalidate 1618, others can too which is why I think we’ll still see another high in the US charts before Labor Day. If and when that happens its likely to be accompanied by the kind of sentiment that creates the one way market we need for an absolute top.
Next page: Area of concern
There’s one more area of concern I have. It’s the housing market HGX. Have you taken 5 minutes to look at it? It’s been horrendous. But it has a chance to bounce being 61 days off its high. Friday’s action didn’t promote that condition but it gets one more chance on Monday. Just when people think the housing chart will be an absolute disaster it has the conditions to reverse just when people think it couldn’t possibly.
Is it challenging enough for you? Be careful these next 2 weeks with the light volume, it could be the lightest volume weeks of the year which is saying a lot considering Christmas. Some of the best trading might be on an intraday basis so don’t stay married to positions. Lock in your profits and move on. What I’ll be on the lookout for is sentiment and psychology as always. To this point everything I’ve been looking for has been fulfilled. Now I want to see if they will take it up one more time to get rid of the rest of the skeptics.