It was the rare December week without the Santa rally. As you may remember, we went with the percentages last week and projected the Santa rally based on the strong surge for the jobs number and rebound in the FTSE. Conditions were a little curious considering the DAX never really got in gear. I didn’t think the next drop would come so quick. So here it is the final week of the year prior to the light volume holiday period. It’s a big week considering the Senate convenes for Janet Yellen even as the Fed convenes to tell us whether or not they’ll taper.
The Producer Price Index fell for the third straight month, which shows a lack of inflation. That’s one reason why gold is sitting near major lows and has been in at least a cyclical bear market for the past two years. The Fed is certainly watching this, and the problem they face is that whenever the Fed starts tightening at the end of a prosperity cycle it’s usually because inflation is about to become a problem. Here we are five years out of the crisis and they can’t get the economy to heat up that way. The only heat they have is a stock market at all-time highs. Without true prosperity, the stock market will go much higher over the next few years. My question to you is whether you think the economy is anywhere near what we can compare to past economic cycles. The economy was blazing by 2007 but we all know it was smoke and mirrors. But in no shape or form does this remind me or anyone else of the economy back in 2000 just before the Internet bubble popped. This economy is not even reminiscent of 1987.
So how great has this prosperity period been? So great the major headline lately has been fast food workers demanding a minimum wage of $15 per hour. I know that sounds curt, but I don’t work under some spin cycle. Last week we talked about GDP and if it weren’t for the expansion of inventories, the third quarter would’ve come in at 1.8% and quite frankly, that’s not nearly good enough five years off the bottom.
So the market was down last week due to tapering concerns. It went against the seasonals, which is rare and now it sets up the possibility we’ll get the sell the rumor, buy the news scenario. It’s been our opinion they won’t start the taper until Ben leaves, which is only one more Fed meeting. Why would they do anything to interfere with the holiday shopping season? They don’t even have to do the deed to get the results, and I believe they are trying to let the air out of the market slowly because they didn’t get a pullback in September or October. I mentioned the percentages and even though we weren’t right about last week we’ll go with the percentages all year long and project correctly most of the time. Be concerned about someone who claims they can be right all the time. Chances are he might be a cousin of Bernie Madoff. So I still think we are going to see a Santa rally but obviously isn’t going to be what we’ve seen in prior years.
Why? Risk is extremely elevated due to the Fibonacci relationships on the Nasdaq chart as I’ve been showing you. Last week it came within 18 points of our 4100 target, and the pattern must know they are getting close because it backed off. Does it have to stop at 4100? Absolutely not, but given the hundreds if not thousands of 161 relationships we’ve seen in all degrees of trend, it’s a fairly strong tendency working against the market. As I write this, the Nasdaq is sitting at 4000 with either a good bearish engulfing or blended evening star, which means the higher probability we have a high in place. The chart of the week is the close-up of the Nasdaq right near the big line but giving us an average evening star pattern where the sellers have not yet taken the upper hand over the buyers on the weekly chart even as they done so on the daily and intraday. If Monday is a distribution day bears will have taken control at least until the Fed meeting which is why we are looking at a sell the rally, buy the news scenario.
The US Dollar is setting up to be a tight range.
On this intraday chart the upper left portion has several parabolic drops where the bears are in control and will be tough for bulls to overcome.
Now as you look to the left what you see is a drop which has good Fibonacci calculations but has also stopped going down right at the point of the last drop to the low. That could be panic or margin selling where the action was forced on market participants. Right now the pattern is above that level but below the level on the intraday chart above. In other words the pattern is trapped between 2 areas and could very well stay trapped for the first half of the week. Considering we’ll get a Fed decision by mid-week we could get off to an extremely slow start.
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