Wednesday, April 1, 2015

SPX and INDU: Bears Await Confirmation

As many of you know, Ben Bernanke recently started a new blog.  His first few blog posts were just pictures of Janet Yellen's head Photoshopped onto a donkey body, but now he's posting more serious topics.  At present, he's published parts I and II of a 789 part series titled, "Why the Fed Sucks without Me."

No, sorry!  That's another April Fool's joke.  He's published parts I and II of a series titled: "Why are interest rates so low?"  One of the most interesting paragraphs from part II is reprinted below.  This is written in the context of whether or not the U.S. faces "secular stagnation":

The Fed cannot reduce market (nominal) interest rates below zero, and consequently—assuming it maintains its current 2 percent target for inflation—cannot reduce real interest rates (the market interest rate less inflation) below minus 2 percent. (I’ll ignore here the possibility that monetary tools like quantitative easing or slightly negative official interest rates might allow the Fed to get the real rate a bit below minus 2 percent.) Suppose that, because of secular stagnation, the economy’s equilibrium real interest rate is below minus 2 percent and likely to stay there.  Then the Fed alone cannot achieve full employment unless it either (1) raises its inflation target, thereby giving itself room to drive the real interest rate further into negative territory by setting market rates at zero; or (2) accepts the recurrence of financial bubbles as a means of increasing consumer and business spending.  It’s in this sense that the three economic goals with which I began—full employment, low inflation, and financial stability—are difficult to achieve simultaneously in an economy afflicted by secular stagnation.

Again, the above is in the context of "secular stagnation," and Bernanke goes on to say:

Does the U.S. economy face secular stagnation? I am skeptical, and the sources of my skepticism go beyond the fact that the U.S. economy looks to be well on the way to full employment today.

Now, I'm certainly not a former Chairman of the Federal Reserve, but I believe it's quite debatable whether the U.S. economy "looks to be well on the way to full employment."  Unless, of course, we count the fact that people with doctorate degrees are currently achieving "full employment" in jobs with titles such as Park's Official Gum-wad Remover.

Anyway, I don't have time to go into that in more detail today, but I am working on a future piece that will address some of these issues in more detail, and which will encompass QE, the Fed, and the finer nuances of removing gum-wads from under park benches.

Let's get to the charts.  On 3/27, I noted on the INDU 30-minute chart that there was potential for a retrace all the way back to 18,000, and I stuck an "Alt.: (2)" label there.  It now appears that count played out, and the rally to 18,008 has the appearance of a three-wave corrective rally.

Here's another look at the daily chart for context:

And another look at INDU's simple trend line chart:

SPX's near-term chart (2 minute).  I published this yesterday morning in our forum, suggesting that wave (2) may have completed at 2089:

Finally, SPX's daily chart for context:

In conclusion, I continue to believe that the market is on the cusp of a significant decline, and that bounces should be sold.  Again, though, I would be remiss not to mention that the market has yet to confirm this thesis (largely confirmed below 2039 SPX).  On the bull side, the first step for bulls at this point is to sustain trade north of 2089, though this would still leave bears additional options.

The bearish potential energy in this chart is now significant, and in the event that SPX sustains trade south of 2039, it is likely to produce a strong decline that may not let shorts back in, and may not let anyone attempting long positions out (except at a loss).  Third wave declines can be fast and relentless.  Trade safe.


  1. There is bearish potential energy but important indicators like Rsi are far from 'overbought'......your thoughts?

  2. Well, I'm still leaning toward the preferred path in green on INDU's first chart (we tested the area near green 1, now may head to green 2). But beyond that, remember that strong down moves usually begin trending when indicators are overSOLD, not overbought. In fact, virtually all "crashes" have started with indicators in oversold positions. Not that I'm necessarily calling for a crash here -- just pointing out the fact that I wouldn't expect RSI to be overbought for a solid decline to begin.

    All that said, bulls are still holding their key level of 2039 SPX. What is most important to me is price, and bears need that level to confirm their counts. Until then, bullish options still remain technically valid. :)

  3. My opinion. Most of the selling on this down move was completed at 10am on March 26. But I'd love to see a nervous decline to S&P 1990s. I highly doubt bears have enough to break below there, especially in the month of April. It's also the Dec, Feb trendline, 50 weekly MA, and just outside lower weekly Bollinger. First, break 2030, which will be hard! Past/temporary lows....2014 April 11 low, 2013 April 19 low, 2012 April 13 low, 2011 April 21 low. I like your blog.