Good Bad or Bad Bad?

Retail sales dropped 0.4% versus last month’s +1.0% (revised down from 1.0%.)  In a market where bad economic news provides the Fed cover to extend QE, we have to wonder whether this is “good bad” news or “bad bad” news.

Surprisingly, the “adjusted” data on which most everyone focuses came in worse than the unadjusted data.   I guess even the bureaucrats wouldn’t mind letting a little air out of this market.

In an environment of flat to negative real income growth, retail sales obviously can’t continue to grow in real terms unless savings fall.  And, that scenario rarely ends well.   In a perfect world, falling retail sales would mean sentiment has probably backed off as well.  We’ll find out at 9:55am when Michigan data comes out.

SPX shed about 7 points in the opening minutes and bounced at the former neckline (red, dashed) of the IH&S that didn‘t play out on Mar 25.

With all the charting I do, I sometimes stumble across an important old pattern I’d forgotten about.  The way this neckline kept popping up in critical situations, I began to suspect it was somehow connected to something more important.

*  *  *

BTW, consumer sentiment just came in at 72.3 vs last months 78.6 and expectations of 76.  This is the lowest since last July, when slower job growth and higher food prices were taking their toll on expectations.

*  *  *

Getting back to that neckline…

It’s actually part of a channel system we’ve examined from time to time (in red, below.)

Seen here in a little more detail…

So, a drop back through it in a few minutes won’t be a minor event.

UPDATE:  11:00 AM

SPX is continuing to sell off nicely.  I’ve added the channels corresponding to the neckline (in red, below) back into to our charts.  It makes things a little busier, but I have a feeling we’ll be seeing more of this system.

I remain short from 1597 [yesterday’s 11:30 update.]   As usual, we’ll take a shot at divining where this correction might take us.

The technical elephant in the room is the previous 1576.09 high — now just 5 points below.  I wouldn’t be at all surprised if the market closed right there — forcing the decision as to whether or not to hold short into the weekend.

Unless 1576 is taken out, any correction will be viewed as a backtest of an important, previously exceeded level of resistance.

This is the exact same situation SPX faced in October 2007 when it exceeded the previous all-time high by 23 points (versus yesterday’s 21 point beat of the 2007 high.)

Of course, it had already had the good sense to back off the first time it approached the Mar 24, 2000 1552.87 high.  But, when it finally pushed through, it spent a total of 7 sessions above 1552.87, closing above it only 5 times before reversing for a 170 point decline over the next 7 weeks.

Are we in for the same kind of shellacking this go ’round?  Before reading any further, I strongly suggest you gather some important supplies:  a comfortable chair, a cold beverage of your choice, and a liberal amount of pixie dust.

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