Dodging a bullet

May 23, 2016 09:02 AM

I am the messenger of good news. As you know, markets have been incredibly choppy.

I don’t do financial astrology, but I do pay very close attention to the Mercury retrograde period that happens several times a year. By the time you read this, Mercury will be direct. Simply put, the MR period turns financial markets into a pinball arcade. We’ve had wild swings lately, haven’t we? The good news is there is a really good chance we’ll go back to a trending market.

We’ve also just passed the SPX one-year anniversary of the top, so that’s more than a year without a new high. That’s fairly significant given other markets like Europe, Australia and China are light years away from 2015 peaks. The problem is China.

The first leg down last year was 1804 points. The latest rally leg peaked at 180 days from that pivot low. You will never see a better example of an important square out on a daily time frame. As I told you last week, a lot of the bad news hit after the square out and while it’s hard to see on this chart, Friday was a strong day and they are in bounce/retest mode against the recent drop.

Right now you see one of the world’s most important economies not only light years from the top, but actually threatening to break down to develop into an even bigger bear market. Going forward, no matter what happens, China risk is going to hang over the rest of equity markets like a black cloud.

Going around the horn, these markets improved technically last Thursday as they looked in the ditch and decided not to jump. Look at the SPX very carefully. From Friday, May 13, which was red, Monday, May 16 was green and Tuesday was red. What that means is the good bull move of that green bar was negated. What happened last year is when we had what I call an "explosion," the bulls weren’t able to recover after they got negated.

Here on Friday they were able to penetrate back into that three-day formation, which means they haven’t given up yet. That is a mildly bullish sign. I don’t want to come here and say we are out of the woods because I don’t think we are, but on the first serious attempt to drop the market bears could not do it.

Friday was also the beginning of the last big important time window off the 2009 bottom. We are in the 377-week window, which is the last Fibonacci number for a while. With a window of three weeks (with a margin of error at +/-1) this window ends three weeks from last Friday. There is plenty of time for a turn.

For now, Transports is holding the important Andrews line. The SOX gapped up on Friday, biotech was alright, oil stocks were questionable, housing was decent and the BKX was decent. All in all, last week turned out to be a week that could’ve ended in disaster, but the market hung on before creating lasting technical damage.

They dodged a major bullet. They are not out of the woods. They are still one major distribution day away from the initiation of a major leg down.

One thing that did concern me last week was the Federal Reserve news. As you know, we learned on Wednesday that the Fed is contemplating a rate hike in June. It’s interesting to me how we end up learning about these things in the valley between meetings. Nevertheless, the bond dropped, which would be expected, but the stock market took a major hit right on the news.

The initial reaction was not good and was the polar opposite of prior Fed sequences. To me they all tend to blend together already, but I remember last year, when the Fed thought of lowering rates, the market sold because they were jittery that six years off the financial crisis the economy couldn’t even sustain the rally. If the market sold when they contemplated lowering rates, why is it selling when the Fed is contemplating raising rates?

The obvious answer is the crowd is less confident now about the future than they were last year, no matter what the 24 news spin cycle tells us. Perhaps a .5% advance GDP has something to do with it.

I know you are looking for an indication on the oil market, as I wrote this on Sunday night we had a near-term intraday time window putting pressure on prices, but there was another window on Monday which could keep oil in a tight range, at least into the middle of the week. More information is needed at this point, but my square out information suggests two possible points of exit to the rally.

Due to two different square outs based on the daily and weekly continuation charts, it’s possible we could end up with a projected high either on June 18 or July 20. Putting aside the dates, I still believe there are higher oil prices in our future.

Turning to social mood, did you see where Target gapped down around earnings last week? Cramer said Target’s first quarter earnings report “stung.” He continued, “I got to fall on my sword here.” He went on and on but I’ll spare you the details. As you know, Target is seriously under fire over the bathroom policy. I’m not sure if I was clear, but this issue swings both ways.

Target is getting hurt and so is the state of North Carolina. Since the administration implemented their new policy last week concerning public schools, a number of states have decided to join Texas in standing up to the president. Aside from the political implications, I see all of this as contractionary to the business environment. Since last week, there was also the tragedy concerning the Egyptian Air plane that crashed into the sea.

One security expert (sorry I didn’t catch his name) was interviewed on FOX on Saturday night and told viewers when he landed at the airport in Paris from the United States that they did not ask to see his passport. As he made his way around Paris he said the cafes and clubs normally filled with tourists this time of year were deserted. In my work I will look at this as a contractionary business environment that will eventually catch up to the stock market.

While lots of people have once again turned bullish and the charts in the very near term are pointing that way, I’d be very cautious.

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.