A word of caution to anyone who thinks trading is a passive exercise. Yes, Facebook got taken to the woodshed right there in the 618th day of the rally. The stock has not recovered and with a screaming headline at Drudge this morning, it appears they aren’t learning their lesson. They will continue to invite regulators. But that’s a stock market story for a different day down the road.
When I woke up Tuesday morning, I saw the calculations lined up perfectly for a low. On Thursday morning, the secondary lined up again and since that point, tech has been shot out of a cannon. This is the same sort of thing that happened after Brexit. Recall, markets were down big and many people assumed the top was it and were setting up shop on the short side. But that Monday night I saw the S&P 500 reacting at a price of 1991 at 91 hours down. This time it was the Nasdaq, with a fine looking square out at 7166 and 66 hours down. Then by Thursday morning, it was another 66 hours where it turned up off the secondary. What you see on the chart is the original low and then another 66 hours, which just so happens to be a 65% retracement.
What that has done to our big-time window is turn the pattern sideways. Rick and Ilsa will always have Paris so in the very least we’ll always have Facebook. What that does is open this week to a massive test of the highs. When I saw those calculations which made for excellent setups on the long side for Emini I knew it was going to lead to a test of the highs unless one thing happened. What I’ve found about square out vibrations is they work the vast majority of the time. It is what drives markets. Not fundamentals. It’s the reaction to the fundamentals that counts. Gann was teaching on this principle 90 years ago.
However, sometimes the reactions could be small. When you get good reactions going one way and they turn out to be small, that means something much larger to the other side is materializing. I had to caution my posse to that possibility especially after an event like Facebook just a few days prior. But so far, the patterns have reacted in a way one who works with this methodology would expect.
So, should also expect a sustained rally leg like we had after Brexit? I wouldn’t go that far simply because the markets are two years progressed down the road and have been looking tired. The probability is high social media companies are going to enter an era of regulation because they just can’t seem to get it right on their own. Not only that, we are in a higher interest rate environment which has changed from two years ago. It’s highly probable the bear market bounce in the bond market has expired but last week they found a low and could end up in a trading range for a while. We still haven’t seen that day where the Dow opens down 400 because of interest rate fears but the odds of that happening compared to the post Brexit era is exponentially higher.
Then you can count on a highly contentious political season from now until November. Will this affect the stock market? I’ll tell you the same thing I did last week. There always comes a point where the market takes it personally. That day might not come for a week or a month, but it will come as we’ve seen. On the surface, what we observe on the political page should not impact the financial page until earnings in some way are impacted. We are seeing an impact on the tariff war with China. The SSE has responded to the time window and is down over 7% in just the past 8 trading days. That might not seem like much until you consider they’ve are down around 24% since January which lined up with the same 610-day window that turned the Dow. Come to think of it, using the logic of the business media, that qualifies as a bear market. This week they are retesting those lows.
The U.S. markets don’t have the same problem, as you know. As for the sustainability of a rally, the market is dealing with historic complacency on the one hand but the country is more divided now than at any time in recent memory. The psychology is none like we’ve ever seen. How could we have such divisions yet be so complacent? The answer might be as simple as people don’t want to see it. That’s why they called the book, “Extraordinary Popular Delusions and the Madness of Crowds.”
When you boil it down, that appears to be the case. The crowd knows something is wrong, that’s why they responded to Facebook the way they did. On the other hand, it still has a quality of amnesia much like a baseball relief pitcher that shrugs off yesterday’s loss.
The week is off to a slow start which means it won’t be easy to break through the highs set at day 610. Remember, we are also dealing with the Mercury retrograde condition. I’m not a fan of financial astrology but I have observed over the years this condition does impact markets on a regular basis. They become choppier and we’ve seen some of that, especially in Forex. But the keynote is realized that under this condition markets routinely under and overshoot targets. The way to deal with it is to take profits too soon. The word for the week is a retest of the highs with and don’t assume because last week was strong, this week will be just as good.