SPY daily chart
In last weeks tactical view, I outlined the overall bullish technical view that developed and the improving fundamentals due to the backstop the ECB promised. I warned against front running a potential reversal, due to the possibility of an extension of the rally.
After Germany’s favorable high court ruling, all eyes turned to the FED, who shocked the system with an announcement of a theoretically infinite quantitative easing plan. The market reacted with yet another pop on the back of an already overbought condition.
Coaxing the lame tired mare with another injection of steroids might be enough to get the next boost, but eventually our horse will need to rest (sidways movement to burn off the overbought condition) for an extended period or it will simply collapse (correction). Destroying the worth of the dollar so that people whose net worth sinks can “feel wealthier” is the FED’s answer, but why? The market already rallied and the thread in Europe is subsiding. Is China about to implode?
Technical analysis is a tiny bit more difficult in the face of such blatant manipulation. There is a notion that the FED can prevent the market from collapse and their commitment to this open ended policy seems to remove all uncertainty from the system. However, this is not what we see on the charts. Lets review:
The day of the announcement saw a panic buying spike (charts above and below). As you can see, the price popped up on very high volume (chart above). However, the advance decline volume was less than on 7/29, a day that saw a similar buying frenzy. Friday opened up and sold off for most of the day, except for some buying (short covering?) during the final minutes. If you compare this candle to 7/30 (the day after our prior buying frenzy), you can clearly see the similarities and the result.
SPY hourly chart
The breakout has a 5 wave character already, which would imply that a pullback is due or already happening. We need to observe how the price behaves at the trendline that is formed from our 2 year wedge (see last weeks post) in order to determine if this is all the pullback we get, or if this is just the start of a more meaningful correction. A first pullback target would thus be 1450, after which we could be looking for a pullback to 1400-1410 on the S&P 500.
Falling below 1450 would still keep the door open for the bearish Elliott Wave count presented last week, but with the FED literally buying up the country (article on ZH), we cannot be certain of anything and an extension of the rally is still possible. Just because the indicators are overbought, doesn’t mean we can’t keep going.
SPY vs. TLT – breakout
Last week I had speculated that we would get a breakout of the Equity vs. Treasury indicator (see above). I must say, I am surprised by the magnitude of last weeks movement. Treasuries sold off, as I had speculated for quite some time, despite Ben Bernanke’s pledge to keep interest rates at historic lows.
US Dollar Index
The damage to the US dollar is quite bad (see above). However, we are coming into strong support and volume is picking up. We should thus get a bounce in the dollar, and with it the correction in equities I mentioned above. How much of a dollar bounce and equity correction is the big question mark at this point.
Gold soars – hurray reflation
As the dollar becomes worthless, commodities and precious metals are rallying strongly (see dollar chart above). Yes, things are surely about to get expensive for American households. But at least we can now all “feel” wealthier according to the FED. With the break of the trendline and the wealth destruction of the FED, I think it is save to assume that Gold will exceed last years highs. Lets see a pullback first.
Small Caps – breakout or fakeout
Small are still outperforming well. The trendline I drew last week held well. In fact we accelerated to the upside, yet the indicators still have some more room to extend further. So far no divergences are forming. I thus expect the breakout to become validated.
Strong financial sector
The Elliott Wave count on the Financials is also favorable for further upside, an overall bullish signal.
Energy rebound
Energy rebound nicely, but appears to be on wave 5 already. Maybe a pledge from Obama to keep Oil prices low to silence QE3 critics will do the trick for a pullback, until the realization sets in that Obama doesn’t control the wells.
Semiconductors ready to resume uptrend
My favorite sector (semiconductors) seem to be on the verge of a resumption of the uptrend. Lets see what comes of this reversal candle we saw on Friday. A close above the August highs will be bullish for Semiconductors and due to their cyclical nature to the entire market.
Technology – a buying opportunity
As I had predicted during the last two weeks, the technology sector relative performance pulled back. It should now be ready to outperform the broad market again.
Australian dollar – ready to make a break?
The Australian dollar / US dollar pair had a good time with the destruction of the dollar and the rise in commodity prices. We hit the highs of August and an important long term declining trendline. A break of this line will be bullish for the Aussie dollar and for commodities. Other currencies (GBP) already broke out, which makes a break more likely.
Germany once more strong
Just like Bernanke’s action rallied stocks in the US, it seems to be favorable for German markets if their high court sells out the German peoples long term future. Kicking the can down the road is very popular these days.
Pumping this much liquidity into the markets at a time after we rallied looks desperate, but that doesn’t mean it won’t work, at least for a while. Next week should be very telling.
Will we get a pullback due to the selling we saw on Friday?
Will this pullback be minor and get rejected at 1450?
Or did we just witness a classic blow off top on euphoric news. What better way to sell all your shares than creating a buying frenzy. At least this way nobody will know you are selling billions worth of them.
There is no way to tell for sure. We need to see the reaction early next week to gauge this. I will write an interim report if I can see confirmation of reversal next week (subscribe via email to stay informed).
Huh, how come you switched to counting with numbers? I thought we were in a correction due to overlaps that counts with letters?
1. Elliott Waves are very complicated to count, but even corrective structures are made of very small impulse structures. The 5 waves you are looking at are basically just the final 5 of a potential C wave. Look at figure 12 in this text:
http://www.elliottwave.net/educational/basictenets/basics3.htm
here C is also broken down into 5 waves, of which the last wave itself is also broken into 5 EVEN smaller waves (not shown in figure 12). It is THOSE very small waves that I counted, in order to show that this could potentially be over. So the point to take away is, when 5 waves are complete, we can expect a turning point. At least a correction should occur, unless this is really the last 5 waver, which would imply a larger correction. We can take this one step at a time, and if 5 small waves unfold to the downside, we know we can expect a retracement and at least another 5 waves down. If we only get 3 down, we get more upside. In short, you could be looking at only the 5th wave of the 5th wave of a C wave of a B wave of a potential Y wave.
2. Elliott Wave and Technical Analysis in general are probabilistic tools. That means they outline a probable path the markets can take, but by no means a certain path. No analyst knows the future and nobody can possibly know what happens tomorrow. Maybe disaster strikes and stocks implode, but I wouldn’t know that. However, having better odds than in a casino, can help you tremendously to make the right decisions and to judge risk accordingly.
3. If the picture according to 3 changes, you need to adjust your view. Only the most stubborn individuals will hold on to their bias indefinitely. I wrote a long time ago, that a break of the 1416 level would create more upside momentum and that taking out the 1422 would then become a higher probability. I said this after I called the bottom at 1267 and gave advise to remain bullish to about 1375. So the most you could have missed out on less than 40 points of this rally. I am however not capable to call the exact top, only show you the warning sings the market gives us.
4. Try not to read my posts through your own bullish or bearish bias. It will lead to misinterpretation. The markets do not care about your bias. You need to be open to alternatives, because otherwise you will overlook even the most probable outcome if it does not coincide with your views.