My lines in the S&P sand
By now, the whole world is aware of the ten-year anniversary of the last financial crisis that most investors have forgotten already. And just to remind us, that most mainstream medium – the BBC – are trailing a major radio series on the whys and wherefores of the Lehman bankruptcy and its aftermath. And they pose the question: What will it take to bring about the next one?
Which means the very concept of an imminent financial crash is well to the fore in the public’s imagination. But do they really fear it? Are UK consumers really fearing for the future?
On an unrelated note, I am sensing the rapidly approaching Brexit is raising anxiety levels.
But because a financial crash only occurs when most do not expect it (and usually comes in from left field), could a sharp decline now thus possibly break that basic rule?
Over in the US, sentiment still rides sky high. In fact, latest Consumer Confidence data reveals it has hit an eighteen year extreme. Most observers are taking that as bullish, of course. They reason that with supremely confident consumers, the great consumer leviathan (which represents over 70% of GDP) will continue to steam full ahead with no sign of any pesky recession on the horizon.
But an extreme high in social mood is precisely the condition that attends major tops in the markets. They never top out on blah data.
And some of the most consumerist of shares – social media – are flagging with Facebook $62 (28%) off its high and Netflix off $110 (26%) its high at one time.
Last week I saw a glimmer of a reversal for US stocks. Here is the S&P
The upper blue line is the upper wedge line I have been tracking since April and has held all rally attempts sine then, except for the brief ‘overshoots’. An overshoot is a significant event in the life of a long-lived line of resistance as it indicates a temporary buying climax and which usually heralds a swift correction down to the lower support line.
As you can see, this latest overshoot accomplished just that with the move lower to the 2902 level on the lower line of support. And since then, it has bounced back up to test my upper line of resistance and is currently in mid-flight.
This means I have two lines in the sand in the S&P. The upper one is the dark blue line and any strong push above it would imply further upside potential. The lower line in the sand is the critical 2902 support and a break below it would confirm my original third wave down idea and herald sharp declines ahead.
Odds are high we shall have a resolution very soon.
Recall last week, I noted an all-time high in the Dow occurred at the Autumn Equinox at 26,780. So far, that high has held with the Dow down by 440 pips at one point last week.
The dollar rallies a little earlier than expected
We have been riding short dollar/long euro positions profitably for a while but with the Fed news last week, the dollar decided to reverse course a little sooner than anticipated.
In fact, the EW/Fib picture is almost perfect with the three up in purple wave 2 on a strong mom div (heralding sharp reversal which occurred). The only slight blemish is the short duration of wave 2 compared with wave 1. There is no law that rules this relationship, but I like to have the waves look ‘right’ in terms of shape and size.
But if this is correct, the budding wave 3 down will be hard and fast.
And a resurgent dollar will play havoc with the global economy as it will result in a scramble for dollars as heavily indebted entities will find it difficult to roll over maturing debt and defaults (and the fear thereof) will loom large.
This is what will trigger the upcoming economic contraction which are always and everywhere kicked off by tighter money following an extended period of easy money..
The DAX is setting up a large H&S reversal
The DAX is well traded among VIP Traders Club members – and no wonder, the volatility can be huge. Of course, most of the time we focus on the short term moves by necessity, but it is always a good idea to take a step back and examine the big picture. It is amazing what you find when you do.
We completed the final wave 5 in January and have started a major bear trend. I have a revised tramline pair with the market currently testing the lower support. Also, I have a budding H&S pattern having completed the head (wave 5) and the two shoulders. I have a down-sloping neckline – and that will be my next target.
If this is correct, and we see a break of the neckline, I project a minimum downside target around the 10,000 area or a little lower.
I still believe Brexit – set for next March in whatever form emerges – will disrupt the German mercantile business model. The Great Disruptor himself is not pleased with their trade policies and with its population ageing rapidly, the scene is set for Germany to decline in importance. And if the global economy stalls, as I expect as interest rates rise, German exports will find it a much tougher environment, especially in China.