Deal or no deal

April 18, 2016 09:12 AM

Before we get into that, remember the new work I showed you last week in the CAC? It was a glorious square out.

Recall the square root of the high was 67.68 and the low came in at exactly 676 real time hours. Do you see the symmetry? That was the clearest indication for a rally last week. Rally it did as the Dow, tech, transports, oil stocks and others were better.

The challenge was that important charts like the SPX and others were on top of major trend line resistance going back to the top last year. On Thursday, the SPX put in an almost perfect doji. That’s not a sell signal, but a very good warning. The NDX put in an even better doji, which came in at 63 days up. Those are calendar days, not trading days.

It’s been a great rally. I’m sure you’ve noticed we are beyond the half-way point through April and before you know it we’ll be in May. May makes it a whole year since the SPX top and its first anniversary, but more importantly the seasonal sweet spot for stocks goes away. We could sell in May and go away again just like we did last year. I don’t think oil has topped yet, but after Memorial Day weekend the seasonals cease to favor oil and we will be there before you know it. These stock charts are finally having difficulty getting through the connect-the-dots trend lines.

The first line of defense you see on the SPX was the brown line, which contained the November and early December highs, but the green line you see with the doji connects these major highs going back to May 20, 2015. A drop here opens up all kinds of possibilities, mostly a multi-month to possibly a 1970- style multi-year trading range. A bear market doesn’t have to drop to be a bear; all it has to do is behave like one. In a consolidation, all it has to do is grind everyone to the point where they no longer believe it is possible for a breakout to sustain. That’s what happened in the 1970s as major brokerage firms stopped recruiting talent out of colleges.

If you are curious, there are many people who want to see the Wall Street get “theirs.” From a socioeconomic perspective, this is partially what the Sanders campaign is all about. You know that millions of young people support that sentiment. Despite the fact that we do have the VIX near euphoria levels again, if you look much deeper below the surface there is a rising anger to what happened in the last decade.

If you consider this kind of angry political sentiment and markets being so close to their highs, you have to wonder what kind of sentiment would have to materialize should we once again revisit the bottom of the range from February or go beyond it. Realize the Bernie Sanders phenomenon is a direct cause and effect to the financial crash with the aftermath of millennials who can’t find good work.

Here's one more chart to think about. It’s the BKX, which has a rally leg now coming off an 89-hour pullback with a range of 6.17. The leg off the low to the March 21 high is 10.48. The last smaller leg is 58.8% of that bigger leg. In terms of Fibonacci/Elliott wave, we’ve discussed that in a bear market an ABC rally up will many times have a short C wave of roughly 61% as opposed to the extension in the main trend of 1.618. The other consideration is this rally has come up to the underbelly of polarity to the rally into the end of the year.

In other words, if any of those players who bought the rally post Aug. 24 are still engaged, had to suffer their way to the bottom and are still holding, they may exit now close to their breakeven point. What we don’t know if there really are people like that. We are going to find out, but we do have a potential for sellers to come into banking right here just as there are people who may sell the top of the trend channel in the SPX. Look for a rough start to this week. By the way, I sold cars about 30 years ago and I heard all the legendary stories.

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About the Author

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.