Head and Shoulders
BofA's chief technical research analyst Mary Ann Bartels has released a note in which she demonstrates the bullish and bearish technicals currently in the market (although with the only thing mattering anymore is when and how big any given Fed permanent open market operation will be, we question the utility of technicals even). While Bartels is still holding on the a call for a "deeper equity market correction" while noting the obvious ("The equity market this year has frustrated both the bulls and the bears, and this is likely to continue into year-end, in our view") she points out that the broader market signals are mixed. She points out that "most short-term indicators have generated a sell signal and Net Tab is not oversold. We still need to break and hold above S&P 500 1150 to invalidate a potential head and shoulders distribution top. A test of the July low (1010) is still not ruled out. A break above1150 would point to a test of the April high of 1220." Today's action shows just how hard the market is trying to breach the upside resistance and disprove all the economic fundamentals that unequivocally point to an ongoing and accelerating deterioration in the economy. Below are the key charts supporting Bartels' call.
"The market stands on the banks of the Rubicon. The technical picture is unusually complex. There are various aspects that are normally associated with topping patterns. Yesterday, it was announced by the American Association of Individual Investors that the percentage of bullish investors had suddenly soared to 51%. That’s usually a big warning signal. Also, on the shelf for the bears remain the series of Hindenburg Omens and the recent VIX sell signal. The bulls are working on an inverse head and shoulders in the S&P. Interestingly, the “neckline” is very near the 1131/1133 level that marks the top of the three month trading range. Thus, a move above that level could suggest a new up-leg in the S&P with a target count of about 1240. That set-up leads traders to believe that a move up through that band might spark a frenzy of algorithmic short covering. That would certify the importance and validity of a breakout." - Art Cashin
Last week I forecast that the stock market would likely rally to test its 200-DMA. We didn’t quite get there, but that’s largely due to the fact that no one was actively trading the market last week.
Indeed, thanks to a holiday week that entailed both Labor Day and Rosh Shoshanna, market volume was truly abysmal. In fact, last week saw even lower market volume than during April 2010 top, which should give you an idea of just how few participants were involved:
Last week I mentioned that barring any additional intervention (monetary or otherwise) stocks would roll over. That is precisely what happened with the S&P 500 falling to test MAJOR support around 1,040 twice.
We looked about read to fall off a cliff until Friday when Fed Chairman Ben Bernanke stated in his speech that the Fed stands ready to do whatever is needed to fight the financial crisis. It wasn’t a direct monetary intervention, but in these desperate times verbal intervention is good enough, and traders gunned the S&P 500 higher back into the gap created by the Monday/Tuesday sell-off.
In this week's update on technical chart formations, Goldman's John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, "looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets - fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside." Yet the most interesting chart formation is the imminent flattening of the 2s30s... not here, but in the UK. Will the Julian Robertson "suicide" trade shift across the Atlantic?
The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared? Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered." - Gordon T. Long
Buy USD & JPY and leave the Bloomie for a few months.
Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing. Whether an unimpressed and insufficiently loyal army general, a fleeing cabinet budget chief or G20 peers going the austerity route, all are non-confidence votes for the Obama administration’s present policies. A day after the courts slapped down President Obama’s six month gulf drilling moratorium, the markets were unpatriotically signaling a classic head and shoulders topping pattern. With an employment rebound still a non-starter, President Obama as expected was found to be asking for yet another $50B in unemployment extensions and state budget assistance to avoid teacher layoffs. However, the gig is up: the policy of Extend and Pretend has no time left on the shot clock nor for another round of unemployment benefit extensions. A congress that is now clearly frightened of what it sees looming in the fall midterm elections is running for cover on any further spending initiatives. The US electorate has been sending an unmistakable message in all elections nationwide. White House policies are unmistakably in shambles. We are rudderless with terribly outdated Keynesian zealots at the helm as the storm continues to worsen. Stage I of Extend & Pretend is over – RIP!
Is a Massive Head and Shoulders Pattern Completing ... Just Like On the Eve of the Second Wave Down in the Great Depression?Submitted by George Washington on 07/05/2010 13:21 -0500
Should we be tightening our seat belts?
The decoupling theorists are about to experience a second smackdown in 3 years. After the biggest bubble of 2008 blew up spectacularly and made beggars out of the Greek CEOs of various dry bulk shippers, only to see their fortunes go back to unchanged again, it looks like they may be retesting the benevolence of NetJets repo men for the second time. The BDIY chart has now completed a rather mutated head and shoulders, after dropping nearly two thousand points in the span of a month - the fastest plunge since the S&P 666 days.And with the Bank of China in liquidity salvage mode as reported earlier, look for much more gravity to come in this index.
Here is why the entire Liberty 33 trading desk is set on preventing a break of 1,040 in the S&P - as Goldman's trading desk technician John Noyce warns, the next stop in the head and shoulders formation, should 1040 be taken out, would be 865, not to mention a complete rout for global teleprompter stocks post the mid-term elections.
Summary of the weekly's events and macro observations courtesy of RCS Investments
Once again, aided and abetted by some soothing noises out of the financial media, and some non-disastrous bond sales in Europe, the bulls decided to take another run at the resistance at the 200 day moving averages (DMA). First, they fueled up the tank as the dollar dipped and the Euro bounced. That brought the usual response – oil and most commodities rose as did U.S. stock futures. The initial assault by the bulls retreated slightly on some less than glorious housing data around 10:00. The media pundits dismissed the data dip as an “expected reaction” to the ending of the real estate tax incentive. That allowed the bulls to regroup within twenty minutes.
The recent surge in stocks is setting up a classic “head and shoulders” top. Anything short of the 500,000 blockbuster number some analysts are expecting for Friday’s nonfarm payroll could tank the market. Is the Dow still overvalued by 3,000 points? Watch out when those low interest rates depart for nether regions. Reversion to the mean can be a bitch.
Bob Prechter was on Teck Ticker today telling us to "stay in cash" because we entered the "second major wave of deflation". Before you go slicing your wrists, relax, it's just the big hedgies toying with your insecurities. I got one message for these big hedge fund swingers: BRING IT ON!