This is a strange set of circumstances. Why? The dollar was up last week out of its triangle and if we follow the usual inverse relationship equities should’ve been down. They were, but it was incredibly uneven as certain areas like biotech and housing got hit especially hard, not to mention some of the newer technology like the Mark Zuckerberg stock. Until Friday afternoon, the SPX and Dow were just fine.
Adding to the confusion is the technical situation of what was already hit. Look at this NDX chart.
From the last rally leg in February, which I happen to believe was the less-sophisticated chasing performance, they initially retraced it to 61%. Going back the other way on this bounce, they also retraced it back 61%. Forget Friday for a minute. When a pattern retraces 61% one way and then does the exact same thing going back the other way, it confuses traders. What does 61% mean in the first place? The 61% retracement means the underlying strength of the trend is weakening. That means the bull going up was losing strength or else it wouldn’t have had such a steep retracement. Many 61% retracements barely make new extreme pivots (in this case a high). Okay now you have the snap back which was also 61%. What that means is the snapback wasn’t all that strong. So you don’t have too much strength going either way. Now let’s bring in Friday. Right now the bull has zero margin for error at 61/61. But let’s just say it shouldn’t have come back to the low so quickly. Right now we are back where we started from when they bounced it originally. It took about eight 360-minute candles to get to a high, and it was erased mostly in one stretch. Any more selling below this level and one just about could eliminate the trading range scenario.
Concerning the bears you know I’ve had a lot to say about them since November 2011. Since the time window in March which this chart is validating I’ve told you the bears are coming with more courage if not a new brand of boldness. Putin had a lot to do with it. But if you had one strong reason to believe in the correction (geopolitical) now with the jobs number and housing affordability issues this thing is suddenly about to let the cat out of the bag.
Your takeaway technically coming into the new week is a market that suddenly has zero margin for error and we are starting to hit the seasonal point in the year where markets tend to correct. That would be the May to October phase.
Last week I told you this was going to be a market frustrating to both bulls and bears. You see the NDX pattern, it’s a roller coaster. But how about those people trading the patterns similar to the Dow and SPX? Do you think they enjoyed the failure to break out on the new high? If anything changes this week it could be less frustrating to bears. But I still suspect we end up with a winding and grinding type of correction reminiscent of the old patterns from the 70’s.
Just a quick update on the meeting I told you I attended last week with the well-known spiritual leader. In my last post I passed along his view the Middle East was hanging by a thread. Part of the problem is peace proposals floated between the Palestinians and Israelis are not acceptable to either party. On Friday, John Kerry stated the United States is reconsidering its role in the peace process altogether. It was just this morning that Ben Stein went on CBS Sunday Morning and said it was time for John Kerry to “wake up.” In a nutshell, the Palestinians are looking for a deal where they would recognize the state of Israel as a state but not a Jewish state. That would mean refugees from across the Middle East who left after Israel became a state in 1948 could return to Israel. Obviously, a lot of those people are no longer alive but their offspring are numerous. What that would do is make the Jewish people a minority in their own country. In a post-holocaust world, that is never going to happen. The John Kerry imposed deadline for talks between the parties is April 29. These days a lot of Americans do not care for Israel as past generations did. But I am here to tell you whether you like Israel or not, it is the absolute key to world geopolitics. If Israel were to hit any nation in the Middle East, especially Iran, a major war would break out and it certainly would impact financial markets. I’ve shown you what happens to charts when war breaks out.
Despite the latest excuses to take the market down on Friday, I still believe 2014 has the greatest potential to be the most important geopolitical year of the young century since September 11.