Caution as Stocks and the S&P 500 rise
"I believe that the root cause of every financial crisis, the root cause, is flawed government policies." Hank Paulson, August 2013
Things were a little less climactic this week as equities moved closer to sideways and the news began to put the herd into whipsaw mode. Two weeks ago when the news hit that Larry Summers was withdrawing as next Fed Chairman, we used DSE and EWT to warn that the futures might be the entire reaction, and the cash on Monday might fail to make new highs. This came true and the market weakened, before running up into the "surprise" announcement that the anticipated 'tapering' would not come this month. We again used DSE and EWT to warn that the one-day-wonder rally was largely short covering, and the conditions "were just not consistent" with the beginning of a major thrust in stock indices. In fact, the opposite was the forecast, as conditions were consistent with the start of AT LEAST a multi-day/week decline; potentially into the Oct. 8th cluster of "turn windows" forecasted by both the Bradley Model, and the Fibo Phi-mate timing models.
Last Friday's action was in line with WaveBOOM's consistent narration throughout last week, where we shorted each rise in NQ and others, and covered and reshorted as the air began leaking out of the balloon.
Monday this week, we showed the following chart to WaveBOOM members. It is a 122 min chart of the ES, showing the potential for prices to slide into the opening Monday toward 1692, where wave 'v would equal wave 'i, if the blue path is in control. It would then take a day or three to see if the white path would take over to new highs, or if the fat lady has already sung, and it's all over. As you can see today we are at that point in the ES chart.
This week we heard a lot about the coming Debt Ceiling and governmental shutdown, the defunding of Obamacare, and after the recent shootings around the country, how gun control must take place. What we didn't hear much about, except from WaveBOOM, is how it's not the guns killing people; it's mood killing them. And, the shift is sadly just beginning. It's not Obamacare that is the problem, it's what's happening to the majority of the citizenry that has been left aside in the bailout of banks and crooks that haven't been prosecuted for fear that they'll tell the truth that the average American is not supposed to know. It's not the Debt Ceiling/shutdown that is the problem, since all the past revolutions of this issue have passed by as the markets rose to irrationally exuberant extremes, but the fact that the system is stretched beyond capacity to the point never approached before.
When past revolutions of these issues have occurred, millions more Americans were working, and more secure regarding their existence than now. Millions fewer were surviving only by the grace of food stamps. Millions knew they always had their houses, which they don't anymore. Health care was magnitudes better than now. America's super power status was undisputed. Now we can't even discipline dictators that use chemical weapons on their own people as we have no money to do it and the world is looking for a "change" in power. Ironically, six years ago, the world rallied around PBO as the messenger of "change". Not only for America, but also for the world.
Change has come to America, as well as the rest of the world, but not the change of our hopes and dreams of '08. More like the change of our denial as few of us could fathom back then, how the common American's lifestyle would fall to depths not seen since the early '70′s, with potential to reach the depressive 1930′s in the near future.
The stock market is clearly stretching toward an overbought extreme of historic proportions. Blackstone recently stated that we're in an "epic credit bubble" and according to Peter Eliades, the NYSE TRIN has been under 1, which is generally considered to be aggressive buying, a disproportionate amount of time over the course of the last two months or so. Trin is calculated by dividing the NYSE advance/decline ratio by the NYSE up-volume/down volume. Eliades finds that TRIN readings of under 1.00 in 35 of the prior 49 trading sessions were recorded on August 5 and then again on August 14 and August 15 and finally, once again, last Wednesday as the Dow pushed to its new all-time high. Since July 1999, Eliades says the only time TRIN managed a similar feat was from November 23, 1999 to January 27 2000, as the Dow Jones Industrial Average reached its Grand Supercycle peak; May 1, 2000 to May 8, 2000 in a weak lunge back toward that peak; and on May 21, 22, 23 and 25, 2007, as the S&P Financials recorded their all-time high. So, the crowd is back in fearless buying mode.
By Tuesday of this week banks were telling investors to expect them to post net operating losses in their core business; mortgage origination! Wow, so if the Fed wasn't letting banks play the rigged game of buy anything and wait to sell it to someone else at a profit (The Greater Fool's Game: there will always be a greater fool than me who I can sell this crap to), the systemic meltdown that has been manipulated onto the back burners for the past 4 years would have played out. Therefore, now is when it is about to play out, when the herd is in the worst shape than in the past 50 years, and the banks are fat with cash (ours). Whatever happened to the gentleman's career in politics?
We continued to short the market on spikes and profit as the Dow, Spx, and Ndx all fell.
Wednesday Our forecasts got a lot of clarity near the lows due to the wave pattern that showed 5 micro waves down from 1708 on the SPX 1 min chart. The only way our model could place that was a fifth wave, as if it were a first wave of a larger third wave down, the preceding wave ii up would have been too short for the market's present conditions. That is, with the a/d remaining positive. If wave iii down were unfolding, we'd have expected the a/d to be well beyond 2:1 negative. So that was a "gut check" that was bothering us, and caused us to put in an ES hedge ladder for the first time in months. Not for the potential for a huge rise, but for the clarity that it provided. Coupled with the Rut and Ndx's failure to match the Dow and Spx's selling, we kept hunting for what became obvious the moment the fifth of wave five showed up. "Ah ha" was our initial reaction, and we BOOMed it to our members within seconds.
In addition, the intra-day stochs at several degrees of trend (478 min, 122 min, 31 min, 8 min, and 1 min) were bottoming, like they'd do if at least a short term low was building. Finally, Vix failed to "juice" up and rolled over, telling us that option traders were becoming more confident that this narrow selling (positive a/d) was nothing to fear.
With this in mind, we overlaid the political battle, and the time until the next risk arrives; the weekend, when market can't "vet" the bullshit of the politicians instantaneously. So, our hallucination began to clarify for a rise into fibo resistance into the weekend, as more bs about a deal is floated. Then, as talks break down over the weekend, the selling would re-assert next week, targeting a shut down on Oct. 1, which put the market into panic mode, culminating in a washout low surrounding the Oct. 8th window for a significant trend change; in this case, a low.
Between now and then, since it's almost impossible for the Dow and Spx to make higher highs above last week's highs without at least a check of the 1675 and 15,100 support levels being tested first, when we get to those levels, the DSE will inform us on the probability rankings of the next outcomes.
One equity we called out on Wednesday was Apple (NASDAQ: AAPL) as it began to struggle due to the iphone hype becoming history. Google (NASDAQ: GOOG), Priceline (NASDAQ: PCLN), Chipotle (NYSE: CMG), Netflix (NASDAQ: NFLX), and many other leaders of the year are getting sold, by hedgies for bonus profit calculations, while lesser names like LinkedIn (NYSE: LNKD), FaceBook (NASDAQ: FB), and Tesla Tesla (NASDAQ: TSLA) are trying to capture the herd's 'animal spirits' of speculation. Looking at Apple, it is in line with our last TraderPlanet article (ask for link to article) which is playing out just as the DSE predicted.
On Thursday we noted that Wednesday marked five losing days in a row for the Blue Chips, which hadn't happened for nine months. In fact, since 1928, when a 5 day losing streak happens so soon after a new 52-week high occurred within the past two weeks, the odds of a rally the next day have averaged 57%, resulting in an average .1% rise that day. We certainly re-confirmed those odds on Thursday as we warned members at the open on Thursday. The two biggest 3 month declines that followed this condition were in 1978 and 1987, when 9% and 27% slides followed. Are we in the "average" scenario now, or are we about to create a new outlier? The two instances that look closest to the current condition are 1929 and 1987. If we look at what happened those two times a year after;'29 was 11% lower, and '87 was 15% lower.
We could write a book about the similarities now to these two historic instances, and differences, many of which have been documented here for the past few months, but none of it really matters until the short term trend rolls over, and begins to build the foundation of the next major exit of capital from US stocks. The foot print of such a roll over begins with a 5 wave decline, which we can see in the Blue Chips in the past 5 days. Unless Spx breaks 1688 with gusto, a rise toward 1712 +/-4 is due to begin today. Breaking 1678 (50 dma) hints that something more ominous is occurring, and below 1638 is the "spoiler" for any return to 1700, while pointing to the imminent test of 1560 relatively soon.
With tapering tabled until October, the next FOMC meeting will be hugely speculated upon. The surprise of non-tapering has now been removed from the equation, and tapering is all but assured within '13.
DSE strongly suggests using the yield relief of the past two weeks as your last chance to lock in long term interest rates, before the 30-year yield moves out of the 3% zone forever, and quickly cuts through the 4%'s to begin the new "normal" zone of the next 5-8 years, in the 5% to 8% zone. That has been DSE's forecast since the 2.5% low 15 months ago, and nothing has arisen to change that, including the bogus $85 billion "hopium" injection that the Fed continues to service the addict with each month.
By the end of the week our macro forecasts were unchanged and we brought to light a few specific plays for our WaveBOOM members. One of those is Amazon (NASDAQ: AMZN) which is about to thrust in a 5th of a 5th wave, from at least the April low (which DSE was all over as a long entry, if you check the archives), and possibly the late '11 low, to test the upper 3 sdb near 328 in the coming days/weeks. The upper BB is 324, which is also strong resistance. So, the range between 324 and 328 seems ideal to take profits on any longs, or at least half of a position, and prepare for a correction toward at least 280 in the coming 6-12 months, if not 220.
Check out the Dec-Jan divergence between higher highs in price and lower highs in stochastics, before further selling took prices from 290 to 245. The same is happening now, but this time, it's after the 3 sdb was tested in July, which didn't happen the last time, showing even more ebullience among the herd for this "certain" home run. In fact, the last time price reach the upper 3 sdb was Fall of '11, as amzn peaked into Sept/Oct at 245, then fell to 170 by Christmas Day (to test the lower 2 sdb)! If that happens this time, 240 is where the lower 2 sdb rests.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.