The elusive top -- when is it going to materialize? Will it materialize? I never thought I hear this with my own ears, but we are on the cusp of another bubble. If you look at the SPX long-term chart, it contradicts what I put in my article on bubbles in Futures magazine last month, but when a pattern fails to correct when it’s supposed to correct, that’s the first warning sign.
Look at these two famous charts from recent history. These are the lead ins to the parabolic phases of the collective moves. I couldn’t classify them as wedges although they are at least symmetrical triangles. Sometimes the slope isn’t steep enough to be an ending wedge but other times it could go either way. The first chart is the 99 NASDAQ and the chart below is the 2009 Silver weekly on a long term continuation. This is the base that generally needs to be identified at the formation of a bubble. We know the NASDAQ was a bubble for certain but precious metals had elements both psychologically and technically as well. Now look at the 3rd chart which represents the oil market. It looks more like a symmetrical triangle as opposed to an ending wedge. We are in a situation where the US came close to a default if anyone really believes that. However you can’t be thrilled about the idea any segment of politicians would use it as leverage. So what happens? The bond market goes through the roof and the equity market continues on its merry way. The only one getting hurt here is the US Dollar where hopeful maybe traders who went long got spanked just as soon as the government reopened.
Technically, we are not at a bubble status yet, but we are getting close. In terms of time we hit larger time windows in the past 6 weeks and bore no fruit. Right now we have another opportunity this week as the equity markets hit 89 days off that great June bottom. I never hope for the stock market to correct but we need a correction.
Next page: A look at the Dax...
Now let me show you another chart which has perfect calculations which got violated in one day. As you look at the DAX ask yourself if it’s a symmetrical triangle or ending wedge? In the box I put up the calculations that were violated from the prior week. In terms of the ratio work we had 3.13 points per day (3.14 Pi), then 6165dg off the bottom for the square of 9 and 1445dg for this wedge shaped formation.
You should the Dow top in 2007 had a reading on the square of 9 of 6177dg (just shy of 6180) so this was close enough. Now you see the current readings and how a perfect topping formation was violated. Now we are sitting at 1584dg for this wedge (1597 is Fibonacci) and off the 2012 bottom it’s an 18.02 factor. The net, net result of all this is the DAX is now setting up once again for a potential topping pattern but this time it’s only the consolation prize. Whatever comes out of this, if it comes is likely to be of smaller degree. How do I know this? After studying nearly 80 years of peaks I’ve come to the conclusion that many of them have similar properties. If they don’t line up perfectly on a time window, they are close. If they hit a time window and also have great calculations we end up with something like 2007. All other topping or bottoming formations have some element of what I’m describing but not all.
So what am I really telling you? It’s time for a reaction, a real one. In terms of the psychology, I’m very concerned with an irrational bordering on the insane type of acceptance and continuation of what I see on a week in and week out sequence. Here’s the next problem.
Have you looked at the calendar? I’m sure you have. This is the end of October; you know we are going to have a Santa Claus rally. We always have a Santa Claus rally. Why? I seriously think it has something to do with peace on earth and goodwill among men. People don’t like to sell stocks too much between Thanksgiving and New Year’s. Wouldn’t you agree there’s a natural built in euphoria to the holiday season? So if it’s not going to correct very soon, then when? If it rallies throughout November, can we really expect a shake of the trees where the nuts and coconuts fall out in December? You’d have to be the biggest scrooge in creation to believe that. Besides, even if it does happen, it’s the extreme lower probability. There have been very few really bad Decembers going all the way back to 1950.
January can truly go either way and my crystal ball doesn’t go out that far. So what I’m doing here is focusing in on the period of once we get to 89 days off June to Thanksgiving.
Finally, the biggest case for a correction in the stock market right here is the oil market which broke slightly below a key Fibonacci level last week. It’s marginally lower but you have to ask yourself why is oil not making new highs like the stock market is? Oil traders have been fairly reliable over the past decade for lining up with a bullish phase in the equity market. When stocks have corrected so has oil. So oil traders have done really well not buying into the economy when it has stalled. The biggest theme from last week is the divergence with stocks.
The extra finally is the SSE from Shanghai which finally turned down from its test of a key channel line. This much I anticipated at the end of the day. Why? Simply put the numbers coming out of China have been too good lately. When a bear market truly ends it leaves scars. If you remember 09-10 as many guests who appeared on CNBC with Maria Bartiromo were asked if they thought there was going to be a double dip recession. Whether they knew the answer or not was immaterial. What ended up happening is that when the Arab Spring kicked in for 2011 and markets were toppy, suddenly Maria Bartiromo stopped asking the question and started talking about a soft patch in the economy. So markets rally up participants and viewers get complacent which is what I’m seeing in Shanghai these days. I happen to believe you’ll end up seeing one more major washout in Shanghai before their long bear market is over.