Fibonacci analysis: Russell, Nasdaq and Dow

May 12, 2014 04:38 AM
Fibonacci Forecaster

Remember a couple of weeks back I told you the key to these markets could be the reaction of Shanghai to Europe? That connection really hasn’t played its hand yet but the European markets start the new week right at a key inflection for the DAX testing the key trend line again while the FTSE tests a key Fibonacci interleg relationship.

In the interim the story has been the Russell 200 which has been leading to the downside. In fact while Janet Yellen fiddled with her testimony the Russell burned. The week closed better but the price action still closed below the 200-day moving average.

We’ve covered why the Russell shouldn’t be leading to the downside and so it was another week without repair. As far as the economy goes, the market is a leading indicator and the environment is no longer supportive of small caps. The impact will not be felt on Main Street for 6-9 months. Consider it an overall tough year for small caps to develop into major behemoths.

The next problem is the HGX which did nothing last week. Its best effort was Thursday and that was a failed attempt to go higher. The BKX is defending the 200-day movign average and while it’s still in a downtrend it does not appear ready to drop just yet. Biotech has been very inconsistent and while they’ve put in a couple of higher lows it can’t get beyond lower resistance levels. One area that has been doing well is oil stocks and that finally stalled on Thursday. It’s not something you would buy right now but it certainly has not confirmed a high.

The Nasdaq (CME:NDM14) representing the best of technology was still repelled by the trend line.

Finally, we have the Dow which may or may not be tracing out an ending diagonal wedge. But what I can tell you with the big red bar on Tuesday, bulls failed to push their edge and get those bears to capitulate because we as of yet haven’t seen those people fully squeezed out of the market. For you Dow theorists the Transports might very well be tracing out a wedge.


A really good squeeze would’ve caused a good green follow through bar on Thursday or Friday and it didn’t happen. While all this was going on the Dow once again put in a new closing high.

Are you seeing the theme emerge? We’ve gone from bears feeding once a week and bulls struggling to get the territory back to bears starting to develop a bit of confidence they can make that appearance more than once a week. But we are still in a situation where the market frustrates bulls and bears alike. That is unless you are short the right tech or small cap names.

There have been more than whispers of central bank manipulation. For years I didn’t want to hear about it because I didn’t believe it. Here in Phoenix the old Elf on Wall Street, Mark Leibovit used to make a daily sermon on local radio about financial engineering. I’ve finally come to the conclusion he has a point. One of my all-time favorite books is Richard Duncan’s “The Dollar Crisis” talks about the exact same thing. Mr. Duncan states that governments have the ability to put off the day of reckoning indefinitely into the future until they can’t. We saw it in 2008 when the long term cycles were ripe.

In case you don’t know, the financial crisis started as a result of the Oct. 11, 2007 top which was a 261 week high for that bull market. A year later the Lehman bankruptcy which caused the first serious leg of the crash hit 233 days off that top while the TARP vote and crash the next day came as a result of the 233 day window off the Nadaq top at the end of October 2007. I’ve never seen anything like it before or since. Now the US Dollar broke intermediate to longer term support but no sooner was it in the early portion of its swan dive into oblivion did they pull it back and now it’s challenging near term highs.

Eventually the U.S. Dollar Index (NYBOT:DXM14) will have a leg down to complete its long bear market but that time is obvious not right now.

Speaking of the bond market it is doing what I’ve anticipated lately. It made the breakout attempt but stalled because of huge resistance on the weekly chart. The stock market has had difficulty agreeing with what the bond market has been telling us but I doubt the bond market has topped for good. Remember this is still the year of the geopolitical surprise and just when you think there will peace the process takes another winding road.

The latest is another referendum in East Ukraine in favor of the separatists and if you think Putin is going anywhere, think again. The only place he’s going is the hockey rink where he suited up in an amateur game in Sochi and the 61 year old leader actually scored 6 goals in a game his team won 21-4. 

The takeaway is while he’d probably be able to score on the New York Rangers power play it doesn’t look to me like he’s too concerned about sanctions being levied. For those of you who think sanctions are going to reverse this ancient dispute which is older than the USA you might need to study history a little more carefully. Eventually I believe the Ukraine will be part of Russia. I’m not in the habit of making predictions and I certainly am not going to judge whether this is right or wrong but as a keen student of European history I think it’s going to happen.

So where does that leave us? The bounce attempt should continue through the start of the week but my opinion has not changed because I have not seen enough evidence there has been change in the bias or the price action. Simply put, the price action has not been that good. What you are seeing is a student performing well enough to get a C or not fail.

I’d really like to come here and tell you the correction is over and the markets are setting up for another great run.

The Dow is still at the peak so there is even dispute there is a correction going on. But this truly is a bifurcated market and there are enough themes available to tell us this isn’t the kind of market that lends itself to a sustained bull run. In fact, these are the kinds of markets that precede major selling waves. I’ll leave you with this to chew on. The bears got burned so badly in 2011. It’s taking a long time to get the turn because bears don’t have the confidence and only take little chunks at a time. But if you’ve noticed every time they get a little bolder. I still believe we are in a process that will still take weeks or months to play out. 

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.