Monday, September 10, 2012

This Week Should Be a Game Changer -- and Two Charts for Bulls

This week has the potential to be a game-changer for the markets.  On Wednesday, Germany's courts will decide if they're going to support the ECB bond-buying program, and Morgan Stanley has put the odds of the program being killed at 40%. 

On Thursday, the Federal Reserve will announce the verdict on a new QE program.  Most of the pundits I've read seem to think QE3 is all but guaranteed -- but I still think it's a long-shot.  As long as the Fed can keep bullish sentiment reasonably high with their Virtual QE3 (i.e.- talking about it and dangling the carrot), then there's no reason for them to actually launch QE3.

Both of these pending announcements are all but guaranteed to be market movers.  I've been arguing the intermediate bear case for several weeks, but a bullish announcement from the central banks does have the potential to blow that case up.  Of course, conversely, a failure of action from the CB's has the potential to validate it.

It's becoming quite unpopular to be bearish, and there's a feeling that the central banks won't ever let equities head south again.  Maybe so; I can't control or predict Dr. Bernankenstein.  But when there are signals present which have consistently led intermediate tops in the past, what's an analyst to do but assume the odds favor these signals will work again?  Past performance is never a guarantee of future results, but we really have nothing else to draw from besides historical market performance.  Imagine you asked me if I thought it was likely that Congress would enact a law raising the interstate speed limit to 120 miles per hour.  I would say no -- but if they raised it next week, I would still have been dead wrong.

So far the market has performed in line with expectations for the intermediate bearish counts.  It's important to understand that there are different time frames at work, and the margin of error is different for each time frame.  I predicted the top at 1426 and hit that turn to the day using short-term wave counts.  At the time, I thought it would be an intermediate turn, which was proved incorrect; and it turned out to be only a short-term top (I still consider that a pretty decent call, considering that there was no sign of weakness at all heading in).  Everything that's happened since falls within the margin of error for the intermediate bear outlook, and I repeatedly stated that no bearish confirmation levels had been crossed to the downside, and therefore a new high to 1440-1460 remained possible. 

So when and where does that count exceed the margin of error?  Again, from a technical perspective, the upper trendline of the proposed ending diagonal is my adjustment point (upper black trendline on the chart below).  A "normal" ending diagonal may or may not overthrow that line to the upside, but if this is a terminal pattern, then any breakout will whipsaw.  If the market can instead break out there and sustain that breakout, then I will throw in the towel on the bear case until further notice.

When I study the charts, I simply can't ignore signals such as the one discussed on the S&P 500 (SPX) chart below -- and these signals lead me to persist in favoring the bear outlook.  If respecting historical significance ultimately leads me wrong in the end, then that's exactly the way I want to be wrong. 

The next chart is one of my proprietary intermediate-term buy/sell indicators.  This indicator has served me well enough over the years that I'm not willing to share the signal components with the general public -- but I have marked each prior signal on the chart, going back to 2002.  This indicator gave a confirmed sell signal at 1426 -- and this is the first time in its history that the market has broken back above a confirmed sell signal this rapidly.  I honestly don't know what to make of that behavior, but either this indicator will prove itself right in the end, or I'll have to add this to my list of "weird" market behavior from the recent past.  This indicator is suggesting that the market is massively over-bought right now.

Next is the SPX 30-minute chart, which still suggests that higher prices are reasonably likely over the short-term.  If the intermediate bear outlook is correct, this should be the final wave up. 

On Friday, I promised to expand a bit on the bull case, so the next couple charts discuss that, and as I've stated, the central banks remain something of an x-factor.

The first chart is unarguably bullish from a classic technical analysis standpoint.  The NYSE Composite (NYA) has broken out above a three-point validated trendline that goes back to spring of 2011.  As long as it sustains that breakout, my bearish intermediate outlook is pure and unadulterated front-running.

Next is an examination of a potential bullish wave count.  I discussed this count months ago, but largely discarded it as unlikely -- again, based on the historical significance of several indicators.  Time will tell if that was a mistake; but if so, that's the type of mistake I'm not ashamed to have made.

While Elliott Wave suggests this count is unlikely, classic technical analysis says the pattern is bullish -- but for now, this remains an alternate count.  Again, depending on what happens next, I will let the market dictate if this count is to be followed or ignored going forward.

Finally, a simple long-term trendline chart of SPX. 

In conclusion, it appears reasonable to assume there will still be higher prices over the near-term.  I remain in favor of the bearish resolution to the intermediate-term... but if you don't like front-running turns (and I've never recommended it for anyone but veteran traders), then remember that the short-term trend is up, the intermediate trend is up, and the long-term trend is up.  Meanwhile, the central bank actions later in the week have the potential to alter either my bearish outlook or the bullish trend.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.


  1. Thanks for the update on the important events this week.  Good report!

  2.  the idea of "virtual QE" is critically important. According to the maxim "Buy the rumor, sell the news", stocks (together with bonds) have been bid up on the rumor of QE. QE has been expected by an increasing fraction of the market since at least June. The expectation of QE, which has become the world's worst kept secret, has already bid up multiple asset classes in dollar terms. But the rumors of QE have now become more important than the actual implementation of QE to the rise of the market.

    Markets have already bid up prices and CFOs have already tapped credit lines. Whenever the actual announcement and implementation of QE comes, it will likely be anti-climatic. Institutions had already been front-running the Fed. Any boost in investor sentiment would be best used by institutions to sell their existing inventory and dump their holdings onto retail investors. The buy-side, however, would look at declining growth forecasts, ISM reports, employment reports, retail sales, etc. and conclude that the prudent choice is to pare down their trading book. The announcement of QE should begin the final capitulation, when retail finally buys in and institutions unload their book on the public.

  3. With regards to your proprietary signal, didn't you get a similar choppy/fake signal in '07 before getting a second comfirmed signal prior to the big sell-off?

  4. The first confirmed sell of 2007 was followed by a nearly 100 point decline... this most recent signal is the first time that a confirmed sell has been followed by only a very small sideways-down consolidation and then immediate new highs.