The big story of the week is the Nasdaq. I think insider trading scandals with the hedge fund people are a lot bigger threat to the market, but it is surprising they don’t have some kind of backup system where they can get things on board within a few minutes. The real distressing part of this is we’ll never know the truth. We don’t know exactly what happened with the flash crash or all the mini flash crashes we’ve seen on the various charts over the past few years. You just have to make allowances to the calculations.
There’s undercurrent rumors that the Nasdaq got hacked from China. I don’t know about that, but let’s say they were true. Are they going to tell that to the public? Then people will come to the conclusion their accounts and money aren't even safe. Oh, I forgot, Jon Corzine already proved that one. But I look at this for a silver lining. Thank God if this was going to happen, it happened on a slow day in August. Thursday was the ideal day for something like this. Maybe they’ll learn from it. Maybe they know the problem and will be able to fix it. Maybe all of this was caused by high-frequency trading and they’ll eventually make the necessary reforms. It didn’t happen on a Fed day or a major earnings day and we can be thankful for that.
Last Wednesday was interesting as it had a similar feel to the events of June 24 when the market bottomed. This time around, people were in a crummy mood while the Fed delivered a split decision on when tapering should really begin. Then I saw a CNBC article that discusses what the chief economist at SaxoBank had to say. Steen Jakobsen says the decline in the U.S. unemployment rate is deceptive and does not point to a recovery in the labor market. That’s close to what I’ve been telling you the past few weeks. He has a different rational as he thinks the entire pool of people looking for jobs is smaller than in prior years, thus allowing the rate to drop. He’s right about that absolutely, but a high percentage of the jobs getting created are in the hospitality industry, which is categorized as waiters or bartenders. Jacobsen thinks Obamacare will adversely affect employment in the future. At the end of the day, he believes the Federal Reserve will require more QE next year as opposed to less. I don’t think they ought to taper right here, if for no other reason nobody would buy bonds.
Getting back to Wednesday, the split Fed decision caused a sell off but the market totally recovered those losses only to lose them again. When that happens, we get the “feel” the market becomes one way and only wants to go down. It was less dramatic than June 24, but the net result is we’ve been up ever since. As of Sunday night, the NQ has recovered more than 61% of the losses, which dramatically increases the odds for a new high. The dollar flirted with a bounce, but lost ground again to hit a fresh low for the sequence and we still think the more bearish aggressive target that would get it below 80 is a real possibility.
If you turn on CNBC in the morning and see the Grand Tetons it must be the slowest trading week of the year. It wouldn’t be a bad idea to take the week off and watch the chart. Christmas is slow but at least the feeling is artificially good by goodwill among men and peace on earth. These two weeks in August are the low volume variety and characterized by the few manipulating the many. Last week was no exception.
So what is the most important consideration for this week? Just when it looked like markets were really getting in trouble, the HGX hit 61 days down and held the line. It slowed the bleeding enough for it to stop late in the week. But now you can see from the chart its challenging important polarity resistance. This chart is potentially set up for a 3rd of a 3rd down. Why? The original ABC down had C being 61 of the whole. That usually means one of two things. It’s either a minimum level bullish correction and we learn in Elliott parlance that in a bullish correction the A wave is normally the one that extends because by the time they get to C selling dries up. But something sinister could also be at work. Instead of an ABC down, it could be the completed wave 1, wave 2 up and the first leg of a massive 3rd wave down. In bull markets that scenario never seems to happen which frustrates bears to no end.
But this one already made a lower low. Now we are also moving into prime time window season as we come to the 233rd week off the Haines 09 bottom and squarely into the 160/161st month off the Internet bubble peak in 2000. If something is going to happen this fall, the next few weeks will be the key. From Labor Day up to the seasonal change point is the meat part of the bat. The next Fed meeting, the one with the press conference comes up right on the seasonal change point in September. We are not that far from the high. As you’ve seen the VIX is dropping again and for my part, I was looking for a shake of the trees to convert the rest of the skeptics and spring the trap. If the market bottomed on June 24th based on feelings it can only go one way which was down, this latest round of selling has done its job. If it continues to sneak higher, give us new highs euphoria is likely to set in and give way to this one way market where everyone thinks it can only go up. When that happens inside a time window, the highest probability is a top. We are not there now and with the last week of vacation more than likely not to be there this week but if things continue along their present trajectory we could be there soon.
I didn’t even mention the drama with the president and Congress. That will be heating up very soon and if there is one thing the market is more allergic to than the word ‘tapering’ it would the word ‘debt ceiling.’ Enjoy the scenery in Jackson Hole, this is likely to be as peaceful as it gets.