I am going to show you a chart that is very strange and may explain why the market is the way it is. How many of you are familiar with Andrews pitchfork work? How many of you are familiar with the average directional index (ADX)? In case you are not, the ADX is supposedly an indicator that measures underlying internal market strength. But here’s the problem, it doesn’t work on intraday charting at all.
So what I’ve done over the years is figure the strength of a trend based on the positioning of where it is within the confines of your traditional Andrews channel. You know the pitchfork, traditional there are 2 lanes coming out of the anchor.
In a bull move the upper channel shows strength while the lower one represents a weaker lane. That being said, take a look at the current state of the NQ:
This is the rally that started all the way back in April. You might remember the blood moon, this rally started right there. The original channel is the bold blue all the way on the left. As you can see the original move was in the stronger channel. When it comes to Andrews you want to build channels to the left, not the right. This has to be right because of all the validations. The recent action is much higher but it is hugging the weakest part of the entire mechanism. All I can tell you this is a condition that is extremely rare. Is it a paper tiger? How about a house of glass?
How about a bubble? If you listen to television, most of the analysts we’ve heard lately will tell you there is none. What is strange about this is more people were talking about the probability of a bubble back in February than right now. One of the prerequisites for a bubble is most people involved in one way or another deny the existence of it.
Think about it, how can there possibly be a bubble when GDP came in at 1%? How can there possibly be a bubble when there are tens of thousands of people who are structurally unemployed and not even counted in the rolls anymore? If that’s the case, how can people possibly try to buy the stock market when rates rise indicating an improving economy?
If you seriously study markets you’ll come to realize there are certain points in history where markets become incredibly irrational and borderline on becoming delusional. I think this is one of those times. I don’t really know what to make of this NQ chart, but what I can tell you is something is not right.
They are also wrapping up another time window with the equity markets completing a 233-236 (Fibonacci 233 to 23.6 retracement) window while the EUR-USD just hit their own 233 window on Friday. We are also looking at an important square of 9 relationship in the Dow at 17,000.
You might also be wondering what is happening over in Europe. Two weeks ago I told you our unique ratio methodology suggested a high probability peak for the FTSE but not the CAC or DAX. In case you haven’t noticed the both of those have gone on to new highs while the FTSE last hit a high on May 15 which is 11 trading days ago. Friday was also a decent red bar which suggests weakness or at least a continued trading range type correction. We have a divergence working in Europe.
Elsewhere the U.S. Dollar had a parabolic move up to the 200 day moving average. Its right there and met the declining average for the first time since last September. What usually happens in this types of conditions is the 200 will flatten out so what that might mean is a flat US Dollar for a while. Then you have the bond market which has made a lot of headlines lately because the market rallied as bond prices dropped (meaning rates went higher). We think ultimately prices on the bond market will end up going much lower but it might not happen for a long time. If you look at a long term bond chart you’ll see its ability to go sideways for weeks or months at a time.
My whole problem here is at 5 years off the worst financial crisis since the Great Depression and the weakest recovery we are in no position to get excited about rates going higher. The price of a gallon of gas is already through the roof and the affordability of houses in this country is already a big issue when you consider the unofficial unemployment rate. My point is if you are thinking about real prosperity coming back like in the 80’s or 90’s we are likely several years away. If the psychology is for the stock market to go up on rising rates we truly should see the bond market in a roller coaster type trading range for at least the next year or two.
I don’t see the bond market going much higher right now either due to all of the serious overhead resistance on the longer term chart. Its been trying to go higher this year. That’s okay but I doubt it could sustain. So what does all of this mean? We have the makings of a bubble right here. In case nobody else wants to say it, I will. But we are on the back end of a time window to last year’s June low. There is one last chance for the market to correct and avoid a true bubble but the margin of error is slim and we likely need to start seeing that correction materialize this week.