Another debt ceiling drama has come and gone but unlike 2011, this time there was no technical damage to the charts. In fact, we’ve reached highs on some charts not seen in years. Time is running out on the 162 month window to the 2000 peak so if markets are going to apply that particular cycle they have to act quickly. Time is running out and as we came into the potential black swan date of October 17. Instead traders ran us back into euphoria as the VIX was lower on Friday than at any time since it started elevating on September 20 for its last low. But let’s be honest here, from where we are now it’s unlikely we can have a sustained rally.
What surprised me about this sequence as we headed into mid-week; I had none of the usual high probability calculations for a top. Normally I’ll have some Gann symmetry or a ratio of points to trading days expressed in a Fibonacci or geometric number. That usually spells very high risk and by Tuesday we had none of that. Consequently, we didn’t end up with a top, either. That doesn’t mean we’ve escaped a reaction or a shake of the trees. It can happen just because of sentiment which simply places a buy the rumor sell the news condition. But they didn’t sell an agreement either.
But the market has done its job in convincing people there is only way the market can go and that is up. Once that happens risk is extremely high and all I need is one chart with calculations and I have it. Here’s the DAX:
This chart has something for everyone. For those of you who love technical patterns, you have a perfect wedge with the correction Fibonacci relationships in the individual waves. This leg in terms of the square of 9 is 1445dg which is just off 1440 which is the 10X144 derivative. From the absolute bottom this move is 6165dg or just south of a perfect 6180. These are the kinds of calculations that create tops. The challenge is we don’t have a similar condition on the CAC and the FTSE topped a long time ago. We come into the new week waiting on Germany. If Germany decides to top, it has the kind of calculations for an intermediate to long term top but it’s the only one. In my studies of numerous tops through the years I’ve found that each index makes its own unique contribution to that sequence and in the cases where it doesn’t the market can still correct but it won’t sustain as deep or long as it might have. What I’m also trying to tell you is the 2007 top had unique contributions across the board, that’s why it turned into a tsunami.
I don’t see a tsunami coming but with the VIX as low as it is, I certainly see high risk.
Putting the cap on the debt crisis, the Tea Party had to play its hand for the reasons we discussed over the past month. They had a horrible hand and a strategy doomed to failure. I’ll flat out make a prediction they won’t try this again next time. But when you have a group of politicians playing around with the good name of the credit of the United States of America it might not be a good idea to buy the Greenback, yet many did. What I told clients is that group of complacent buyers (or early short covering bears) is they were likely to get spanked. This is a fantastic chart and I’ll show you where the real opportunity lies.
One of the newer features of our training program and newsletter is the advanced Fibonacci work and here just so happens to be a Gartley Butterfly set up. The move up in the last sequence is a virtual double top where a bullish Gartley failed. When that happens it might work at 1.27 of the leg up which you see just below at 79.42. But here you have a case of buying complacency and the ultimate spanking although it didn’t happen for the exact reason I was looking for. What happened was the drubbing materialized as a sell the news event. I think traders got a very sour taste not because they played around with the good faith and credit of Uncle Sam. I think they were fed up the can was kicked for only 8 weeks. How many times are they going to kick the can? Can’t these people make a deal for the betterment of the country and the world economy? Apparently, the Greenback is the casualty because it’s getting beaten up. But if the stock market tops this week, which it might then your sleeper trade would be the inverse play in case this setup works out. We are certainly in a position for the long term as the Greenback has reached critical bearish aggressive targets on the daily chart that we’ve talked about for months.
Is there anything new possible this week? I’m glad you asked. Finally, finally there’s a chance the precious metals can confirm a bottom by confirming a secondary low as it starts the week sitting right on an important attractor/trend line holding the recent downtrend. Before we get too excited precious metals has been here many times before and failed right on the cusp of the breakout. So here we are again. This is the best chance it had in a while and we are very close. Why might it actually confirm? In terms of the Gann square of 9 it has the proper reading; the move down from August is a perfect 450dg move.
Here’s the outlook coming into the end of October. This weekend is the anniversary to the 1987 crash and while that is likely off the table risk is incredibly high as there are so few people looking for a top right now that we are due for some kind of correction. We’ve reached the point where if we don’t get a serious shake of the trees in the next few days we’d have survived through September and October without a nasty correction. What that would mean is a potential bubble developing. Markets that don’t top end up becoming bubbles and we are getting close to the formation of one. But since bubbles are rare and we’ve pushed the envelope just as far as it can go, the higher probability is we’ll get some serious reaction going the other way sooner as opposed to later.