Awaiting a glorious...or annoying week

The many finance sites, blogs and message boards are indeed buzzing with a lot of ideas about the week ahead. Will it be the first significant victory for the bears since last November? Or was last Fridays fall just another cruel tease? With the futures wheel not even open yet....I have a theory....


H/S..within H/S....within H/S

A beautiful fractal. Is that what we have? Lets first keep in mind these 3 perspectives:

SP'60min

SP'daily - bearish count

SP'monthly

So..we have the baby H/S on the hourly cycle, that formed part of the RS - as seen on the daily cycle. From a very broad monthly chart perspective, you can see what is possibly a giant H/S - which covers the entire 'rally of delusion' since the March 2009 lows. Is that what we have here?


'Oversold' can last a rather long time sometimes

With much web chatter of big market moves to the downside, I wanted to also post a few notes on something that I think will be very important for the coming weeks. Generally speaking, the market never stays oversold on the hourly charts for more than a few hours - which is always a problem for anyone holding short across multiple days. However, there are rare periods when the market does fall, and keeps falling. Lets look at two classic recent instances:


1. The July/August 2011 wave'3 - 60min cycle

2. May 2010 - Flash Crash week - 60min cycle

The most important point that I always gain from seeing such hourly charts is the great respect given to the 10MA, when the market is in a consistent down cycle. I don't know why the 10MA seems to be the usual resistance/wall, but in my observations of this crazy market, that's what I continue to see. Just last Wednesday the market rallied from 1394, and later failed at the10MA of sp'1403.

Now, there can be brief moments when the 10MA is broken above - and indeed that often merits being stopped out. However, the two charts above are good examples in that a slightly looser stop 1% (3/5% leveraged ETFs), would be enough to stay in a position.

As for the flash-crash chart, look at the RSI and MACD (green bar histogram) cycle, both were oversold for around 4 solid days.

*ohh, and happy flash-crash anniversary! It has been two bizarre and twisted market years since that turbulent week. It remains laughable of course that the mainstream still wish to attribute a 'fat finger', or blame Waddle/Reed for the 500pt fall across just a few minutes. 
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Was sp'1422 the peak of the R/S of the 'giant H/S formation' ?

That was the question that came to mind this weekend. If the answer is 'yes', can we assume roughly that the right side of the RS will act much like the right side of the LS? Lets consider the right side of the LS from April 2010. The infamous flash-crash adds a bit of extra spice to this chart, but regardless of that extreme trading anomaly, you can see the down cycle from the peak to the eventual floor took 66 days.

SP' bearish outlook - 'right side of RS theory'

I struggled with creating this chart, the drop seems way too severe - although the same thing happened not only last July, but also in May 2010. So, its not like we haven't had some good instances of this action before.

The important aspect of the April-July 2010 cycle was it seemed to be some sort of ABC/123 wave. Logically, would not the RS act kind of like the LS ? Its just an idea...and the above chart runs with it.

Assuming sp'1422 was the peak, add 66 days, and that gives us a target floor date of Wed' June'6. Now, I'm certainly not going to get obsessive about precise dates. Frankly, if 'sp'1150 was hit by late July, I'd still consider that a very successful outcome.

So, I'll be keeping early/mid June in mind as a possible floor. However, were we to get close to such a level this summer, other even bigger issues then start to come into play. A break of the lower channel/wedge line would be a critical warning that the giant H/S theory is not only confirmed, but completed, that and we're going to either keep falling or...snap hard higher. If we see the market under sp'1100 this summer, some of the older major market doom projections then will need to be re-considered.


The week ahead

We don't have any major econ-data this week, so the market will most likely be focused on the aftermath of the EU elections this weekend. Will the $ have a strong week, with the € breaking below 1.30 ? As I noted last week, both the daily and weekly cycles for the Euro are primed to cycle lower for at least a week or so. If that is the case, it will add extra downward pressure to both the equity and commodity markets.

The Bernanke does a talk this Thursday, and that's always something for the bears to beware of. I'm not sure if its significant enough event for the clown channel networks to wish to cover, but they sure might want to hear some 'hints of QE' if the sp' is down to 1340/00.

With the 'super moon' now out of the way, how will the market open Monday morning? The consensus view I have observed is that Monday is set to open at least somewhat lower, and then a bounce - most likely around 1355/57. A stronger opening gap lower of -20, and the bounce would even more likely occur around 1340. A bounce would probably last at least 2-4 hours, and add around 10/15 pts on the SP. - with a subsequent fail at the 10MA. That is something to keep in mind I believe.

Good wishes for the trading week ahead!

Weekend update'2 - World Monthly Index Cycles

It is again time for a grand overview of ten of the world indexes. For those looking for the very best perspective on the state of the world equity markets...here it comes....

(all charts - monthly candles, 20yr historic overview)

Greece

The horror of the Greek market, nothing to add here...the picture says it all.


France

The trend is down, next level is 2750, then 2500...and the big 2000. A drop to 2000 would be a drop of 35/40% !


Germany

Even the mighty German Dax is rolling over, next key level is 5500 -a drop of 1000pts..around 15% or so. If that fails, then 5000. The ultimate issue would then be..' a break of 5000?', if yes, then 3500 would be next - which is some 45% down from current levels.


UK

Rolling over, next level 5250..then 4750..if fails...then empty air until 3500 - back to the 2009/2003 collapse wave lows.


Hong Kong

Still holding up very well, and currently displaying a little bull flag. First support at 18k, then 16k, then 13k. Right now, even 16k looks very unlikely.


Spain

The Spanish train wreck continues. Lets be clear, the Spanish market has been in crash mode since the February peak. The IBEX saw a classic fail at the 10MA, next key support is at 5000. That is a good 1800pts lower, around 25%. I would safely assume that if the Spanish economic depression is not soon reversed, the IBEX will eventually break the 5k level, and go the way of the Greek index, breaking 3k..and eventually sub'1000. An outright deflationary collapse.


USA

The Dow May candle is now red of course, is this the start of a major new down cycle - like summer 2010 and 2011?  The next soft support is the 10MA at 12379, next main support is the wedge/channel of 10800, by end summer that will be around 11k. So, we have a clear 2000pts downside across the next 3-6 months.

A break of 10400 (October 2011 low), would be the first major warning of a deflationary collapse. Of course, that is almost 3000pts lower from the Tuesday peak. This is one reason why such warning levels are arguably useless from a practical point of view for the long term investor. A warning that only triggers after a 25% market decline...no, there is not much use in that.

The 'big money bears' will have stops at the recent 13338 Tuesday peak. For those using good short-stops, it really is a very clear trade right now.


Italy

Like the Spanish market, Italy is now about to confirm it is moving into a crash mode. Of course, the market is already down 60% from the high, it has not exactly been a great place for the retail investor since the 2000 and 2007 peaks.

A break of 13k opens the door to a huge 30% further downside. There really isn't any clear levels under 10k, but that's a long way down, there is no need to be concerned with that right now.


Japan

The nation of the deflationary collapse, peaked in March - after appearing to show an initial sign of a breakout to the upside. Instead, we now have a wave lower underway, first key level is the 10MA of 9100, and then the double low of 8200/8100. A break under 8000 opens up a fall to 7k. I'm unaware of what key levels under that are, although the big 5k would obviously be one.

The MACD (green bar histogram) cycle is now flat, and even a further small fall across May and into June would confirm a summer rollover.


 China

Lastly, a look at China, which is possibly the most interesting of all the world indexes. China is sitting at the very border of either a major fail, or a major breakout. Which will it be this summer? A fail..would likely take the SSEC to the 1700 level - a fall of 25% from current levels. A fail at 1700...opens the door to a further 700pt to the ultimate psy' level of 1000. In my many  years of following the world economy, I've yet to see a 'soft landing'. I'd guess if China were a plane, right now might be a good time to be putting on the parachute and preparing to bail from 2452ft. Its a far safer height than trying to exit at 1000 !


Summary - the ten world indexes

1. Already collapsed - Greece
2. In state of collapse - Spain, Italy
3. Confirming 2-3 month rollover - France, Germany, UK, Japan
4. On the edge - China, USA
5. Flat, still possibly bullish - Hong Kong

I've tried (really!) to be fair in this brief assessment. We have 3 EU indexes already in a mess, with 3 further EU markets rolling over - along with Japan. If both USA and China show weakness in the coming weeks, we could see them put in confirmation rollover candles by late June. Hong Kong, is literally an island unto itself, perhaps it can merely hold level, whilst the others start unravelling?


Looking ahead, the rest of May, and into June/July

We have seen major down waves in summer 2009, 2010 and 2011..and here we are again, facing another such wave. By late July, are we looking at the Spanish IBEX 5000, French CAC 2500, with the USA indexes - Dow 11k, SP'1100 ?  Right now, that would appear to be the logical outlook.

If the Bernanke -and other central bankers want to halt this new decline, they better step in with new QE immediately! However, as I said to another trader this week, the Federal Reserve has never been pre-emptive in its actions. It has always been reactionary, and I'd cite QE1, 2, and op-twist as support for that view.

I have to believe the Bernanke will again be reactionary, and wait for Sp'1150/00 in the coming few months, before he feels the justification - and has the overall political/media/Federal Reserve board support, for a further dose of insane money printing to kick asset prices back upward.

Weekend update'1 - Weekly Index Cycles

It was another pretty crazy week in the market. First, I think its important to remember where we were last weekend. We had seen a bullish engulfing candle on most of the indexes, and the outlook was therefore bullish! What did we next see? Monday saw an early morning decline, but Tuesday saw another strong morning gap up in the market, and the Dow made a new 4 year high. At that moment, the entire bear case was completely blown out. There was nothing bearish, and much of the 'serious money' by the bears would have been stopped out.

Yet the Dow was indeed the only index to make a new high. By the end of Tuesday I had a theory we were putting in a new mini H/S...and that indeed panned out! It is not often I spot them myself, so that was the real highlight of my trading week :) 

So, we've gone from a bullish engulfing candle to what is almost a bearish engulfing candle! I say 'almost', since its not perfect, but it is around 90% of what it should be.on most indexes. Lets look at those weekly cycles!


IWM, (representing the Rus'2000 small cap)

A fail at the 83 line, that is THREE months of fail. This is pretty astounding, and is now the second most bearish index I can find (The transports remain the weakest sector). First downside target remains 76, a break of 75 would opens up 70 (equating to sp'1270/50)


NASDAQ Comp

The action in the NASDAQ looks like a mirror of July 2011. Now, I'm not saying we are about to see a giant collapse next week, but the pattern IS the same. First target remains 2875...if fail, then 2600.


Dow

The Dow broke above the key 13300 level (having failed for 7 previous weeks)...yet it could not hold. The weekly close of 13038 is VERY dangerous. A fall under 13k (which I now believe is assured, and actually happened in Friday AH trading!), will lead to at least 12700 and quite possibly 12200/300 within the next 3-9 trading days.

From a bearish outlook, we are 250pts down...potentially another 750pts to go...'soon'.


NYSE Comp

The master index is looking weak again, first target 7800, if fail..then 7500.


SP

The SP' weekly is a very clean chart, a break of 1357 will take the index to at least 1300/1280. There is good potential for 1270/50..if the down cycles losses are more than 30pts on a given day.

One thing is clear, a break of the recent low of 1357..will trigger a LOT of bull stop-losses, that is where we could see some really big down moves occur, with further stops at 1340.


Transports

What appeared to be a bullish pennant last weekend on the Transports did indeed break to the upside, with 1% gains on both Monday and Tuesday. Yet...the Tranny could not hold! It is now putting in a VERY dangerous spiky/fail candle. First target now would be a break under the pennant, with a quick move to the big 5000 level.

A break under 5000...and the doomsters will have a major victory, next target would then be 4500 (as determined via the monthly cycle)


Summary

This market sure is a tough one to discern. In the space of just a week, we've moved from a bullish outlook - on good evidence - which WAS even confirmed on Tuesday (when the Dow made a new 4 yr high), but the market could not hold the gains.

The close on Friday was especially weak, and we will most likely see some very significant falls in the coming week.

Best guess right now, 1340...a bounce (10/15pts)...then a further move to the important 1300/1280 level. If the down moves this week are big, then the 'flash' levels are the 200 day MA - Sp'1276..and then 1200. The notion of 1200 right now though is obviously 'crazy talk', but those are the keys to be aware of.

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Still to come this weekend....the '10 world indexes, monthly update'..and they are massively important for what may pan out across the next 3-6 months.