This was my thinking and what I told my subscriber base on Thursday night:
"Why don’t you anticipate a failure now? It’s because of the herding instinct and the collective mind known as the crowd is extremely bullish at this point. So we feel what they feel but must separate ourselves from those feelings and look at the chart objectively. Can it go higher? Of course it can, just like a bubble can form at some point but from a pure technical view, this is the big test of polarity. You either pass Go and collect $200 or get thrown in jail. The readings are suggestive of an extremely overbought condition."
A lot of people feel bullish these days. Ask just about any money manager that comes on CNBC and they expect the rally to continue. If they don’t, they push that day out when the correction starts to some nebulous point later on in the first or second quarter.
It is really hard to think that change can come tomorrow. Think about this for a minute. It’s okay to feel bullish, especially when everyone else does. It’s how we are wired. What is not okay is a failure to interpret those feelings. When the market was coming apart at the seams this time a year ago you would almost have to be a robot to not be scared. Heck, we were all scared. When I heard Jon Najarian admit he was scared on Fast Money one day I knew everyone was scared. But being scared is not the same thing as taking the right action. In this business you must feel the fear and do it anyway. At the right time, of course. Luckily we have a methodology that recognizes when markets can turn. If you doubt that, go back and watch either one of my recent webinars where I taught you how to recognize a significant bottom in the Russell as well as significant lows in Corn and Nat Gas.
On Thursday there was any number of reasons to think a high could be in place. There are readings in the NDX, QQQQ and the SOX that square out right here. The Russell is up 89% and also has an excellent price and time reading. It has also rallied up to significant polarity in the form of the bear market rally from March to August 2008. If you forget this is a weekly chart and pretend it was an hourly, you may very well come to the conclusion the action has reached significant overhead resistance. This is the kind of setup that fails on charts in all time frames on a regular basis. If you don’t look at anything else, this is a chart that should make you think about those bullish feelings.
Last week at this time I told you I thought risk was very high but I thought there was still a little gas left in the tank. As it turns out, some charts hit the high on Monday but the SPX managed to nudge a little higher by Thursday. What concerned me about it was the fact that tech did not confirm the new high, even as it missed by a slight margin. I also thought we could have a key reversal day on Friday where prices went above Thursday’s high on the open and close below Thursday’s low. It didn’t turn out that way, mostly because Intel spiked and did the job for us in the aftermarket of Thursday night. Friday was just a continuation of what started Thursday night. What made Friday more significant than other Fridays? This time we had the start of a new lunar cycle as well as the solar eclipse which many times has a profound influence on stock prices. The eclipse was only visible throughout Asia and Africa and may have also been visible on the statistics board on the wall of the NYSE.
So what are the chances of a high? For that we look to the BKX chart which has been a leader in the bear market. On this chart you can see dark blue lines which have been instrumental in the latest rally leg. As a matter of fact, the upper median line has stalled the action. We also have a more aggressive set in light orange which is faint because it is less important. But the mid line of the blue set crosses the lower rising line of the orange set at about 45.56. Additionally, that line is also the 38% retracement for this rally leg. If that breaks the market is in trouble as banks will test the lower end of the range. But if prices get that far they’ll be back in those downtrend lines first established in October. If that were to happen the path of least resistance would certainly be down and anything would be possible.
Looking at this from another angle, a market that still has good relative strength should hold the 38% line. The SOX chart has a similar type of floor sitting at about 338.
Who said the inverse relationship between equities and the U.S. dollar was over? For the week the dollar dipped below its 38% line at 77.15 but finished the week back above it. As we enter the new week the dollar is on a three-day rally that is testing the upper portion of the downtrend it has been in. A good start to the week may very well confirm the end of the correction. As you know, I’ve held firm in my belief the dollar is in a larger bear market rally and by the middle of last week the long, winding, complex pattern had frustrated traders enough into thinking the greenback was going back into the bear.
Finally, I’m not going to come here and tell you this is the top and we are back in the bear market. I need to see more and all I am going to say is the end of last week was an important astronomical time window with an extremely overbought condition and prices appear to have responded to it. My readings show elements of an important high but we do need to see the follow through and confirmation. I’m not going to allow myself to look beyond the next sequence.