Pre-Market Brief

Good morning. Futures are a touch lower, sp-4pts, we're set to open under the big '1400 level. All things considered, that's not a bad start for the bears.

*Durable Goods Orders: (ex-trans) -0.4% vs 0.4% expected.
There were also downward revisions, all somewhat negative for Q2/3


sp'daily5

Summary

So, futures are suggestive we'll get a break under 1400, and maybe further weakness can at least briefly get us into the 1380s by the close.

As the daily chart shows, breaking 1380 will be difficult, although a bigger trend (not shown) from Oct'2011 low to June low...has the trend at 1350.

I think bears should be able to get another few days downside, but with the Bernanke next Friday morning, I think a 'benny bounce' will occur..and it could be a big one.

More across the day.

Awaiting a red candle

To close today, I thought I'd throw another new chart out there into the collective. There are no bold scenarios or price targets, this chart merely highlights an issue I think many struggle with - discerning the turn in the bigger cycles.


Sp, monthly'3e, rainbow, 17yr

Summary

First, I'm using the rainbow chart style here, which is the 'Elder Impulse' system. I find it a good colourful way to more clearly highlight the broader trends.

There are quite a few things to note here...

You can clearly see the 3 big bubbles of the last two decades, tech, property..and now the paper/QE bubble.

The first two bubbles were pretty straightforward. Particularly interesting is that in both of the down cycles, we did not have any green candles. Also, the bounces were contained (almost always), below the monthly cycle 10MA. The floor in both cycles was marked with giant reversal blue candles.


The problematic third cycle

Since the lows of March'2009 we've seen 3 pullbacks - with the latter being the more moderate one. As noted on the chart, it is because of the anticipatory nature of this market - forever looking for more QE, that the declines were not more significant.

So far, in each pullback, the Fed has subsequently delivered with more monetary easing/paper printing. Although yes, QE-twist - currently ongoing, is not new money as such, its merely 'bond curve' meddling.
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I intend to highlight this chart regularly in the weeks ahead - and particularly at the end/start of each month.

What is absolutely clear, the bears need to see a closing monthly RED candle to suggest a grand cycle top is in.

As for how we end this August, a red candle seems unlikely, but blue is viable (the Dow, NYSE Comp are already blue). I think we'd need to close next Friday around 1380/75 to attain a blue candle.

On balance, it still seems the 'best bear case' this autumn would be for a decline to the lower bollinger, around the sp'1200 level, maybe a touch lower, 1170/50. I certainly would disagree with some of the doomers out there calling for sp' under 1100..or even 1000 before year end.

If there is anything that can be discerned from the previous two giant cycles, it is that it does take some considerable time to build downward momentum. Sure, if we can hit sp'1200 sometime later this autumn, maybe 2013 will indeed be the year the bears can go on the rampage. As it is, we have a green candle..and that is most definitely not bearish!

Anyway, I think the chart above is certainly something to consider.

Goodnight from London

Daily Index Cycle update

Todays declines were very important for the bears, although they were certainly nothing to get hysterically excited about. We still saw the SP' put in another close over the big 1400 level, so the bulls can still be pretty pleased with how things are going.

With the VIX still in the mid teens, it can still be said there is no major momentum right now, so the current down cycle will almost certainly not amount to very much.


Dow, daily

Sp, daily5

Transports

Summary

Reasonable declines today, but...its nothing dramatic, and bears should not get lost in the hysteria of believing the current decline from the sp'1426 high is something major.


So..how low do we go in this cycle?

Considering the weakness in the market, with such low volume, and a VIX that remains in the mid teens, I find it very unlikely we'll break much below 1380. There are plenty of others out there touting 1370/65, I suppose thats just about viable - before the Bernanke speaks next Friday morning, but I'll sure as hell not want to be holding any short positions around that time.

From a cycle perspective, we could certainly fall for a good 3-5 days, so that'd get us to the middle of next week. How about VIX 18/19..and Sp'1375 ?

Right now, that'd be my best guess..pre-Bernanke @ the hole.

A little more later.