On the exceptionally light volume of Friday’s session, the SPX staged a breakout over its 200 dma and a major resistance line. The Dow Jones Industrial Average also knocked out my preferred count, which had held its ground since October. The SPX did not KO its count, however the assumption now should be that it will. This has shifted preference to the short-term bullish alternate count, which sees everything since August as an ongoing correction to the first leg of a major bear market.
Now we find out if the dip buyers are serious about driving this market higher. From the standpoint of the global economy, it seems that China and Europe are in worse condition than they were back in July of 2011. However, any trader worth his salt will tell you that the stock market sometimes has little in common with the real economy. So the question now is: are the bulls for real?
The first thing I’d like to address is the shift in preference from the preferred count to the first alternate. While this rally was anticipated by the alternate count, I can’t claim victory in that regard; clearly I was in error selecting the more bearish count ahead of the alternate. My analysis was based in part on the fact that several markets (such as the dollar and Euro) seemed to be indicating that equities were due for lower prices. This is one challenge with market correlations: sometimes they work, and other times they don’t. Clearly, this is one case where they didn’t work — since August, the dollar is up more than 8% while the Euro is down more than 10%. In the past, these situations which have often led to lower equity prices, but despite that, the SPX is up 15% from its August lows. My analysis on the Dollar and Euro has been spot-on, but perhaps I gave the currencies too much weight in my equities analysis. Or perhaps it’s just the market’s nature to keep everyone guessing sometimes.
One reason equities and the dollar have correlated fairly well in the recent past is that equities were being purchased as an inflation hedge against the QE printing. Whether equities can sustain an uptrend in a deflationary environment remains to be seen.
Along those lines, the first chart I’d like to share is the US Dollar, which has performed according to my projections since early September. The chart below is an update to an article posted on October 29, and so far it has tracked perfectly. If it continues to do so, the current equity breakouts are likely to prove to be nothing more than light-volume hope and hot air.
The Euro has also tracked well, hitting and exceeding my most recent published target. The current move in the Euro appears corrective and is suggestive of new lows to come. I have not listed the target on the chart, because it is still possible for this to be the b-wave of an a-b-c correction. However, if the preferred count on the Euro is correct, it suggests prices will ultimately fall toward the 1.10-1.15 range, and potentially even lower.
Moving on to equities, I want to focus on the Dow chart first, since the Dow has now made a new high above October 27. The Dow chart shows a possible target, if it follows a similar path as it did in October. There is no requirement that it does so. The dashed red line indicates the knockout level which needs to be held by the bulls over the short term. A trip back through that price territory in the near future could be devastating to the bull case.
The next chart is a one minute chart of the SPX, and is an attempt to gain a handle on the micro structure of the waves. This chart suggests the rally is nearing completion.
If the micro-labeling above is correct, it implies a cap of 1295.42 for the rally. If it’s not, the larger structure suggests a target of 1269-1310, as shown on the intermediate term chart below. The next two weeks are seasonally bullish, and the week between Christmas and New Year’s is another low-volume week. That could allow the market to drift higher into the target zone before the Big Boyz come back from vacation. Note how light the volume was on Friday’s breakout (below).
In conclusion, I remain bearish. If the current count is correct, the market is trying to lure the last of the buyers on board before turning south in a big way. My current view is that the technical breakout being staged is likely a head-fake, paving the way for a nasty reversal. Trade safe.