SPX reached our 1543.43 target yesterday, exceeding it by 4 cents before reversing to close below 1540. This was a 1.272 extension of the decline from 1530.94 to 1485.01 that began on Feb 20.
But, 1.272 completions result from Butterfly Patterns. And, Butterfly Patterns require a key reversal (Point B) at the .786 Fib level. The move up from 1485 barely reacted at the .786 Fib level, but saw a significant reversal at the .886 Fib. So, harmonics suggest a move to the 1.618 extension for a Crab Pattern (though not always so, see the 1:30 update below.)
The futures are all pointing skyward this morning, with the eminis indicating a willingness to ignore several key Fib levels – albeit on negative divergence – and the dollar and euro at key inflection points.
UPDATE: 10:05 AM
The EURUSD just broke down from the little channel we were watching earlier and is back below 1.30 again.
The next significant Fib support is 1.2875-1.2885, but the .786 or .886 on the 15-min chart above should be watched. If one produces a reversal, the pair could try to redefine its falling channel from the current steeply sloped white channel below to a kinder, gentler version such as the purple.
Stocks spurted higher this morning on a better than expected ADP employment report which, for all the hoopla, shows a month over month decline.
Offsetting the “good news” is slightly more credible word from the Census Department that durable goods fell off a cliff last month. Total new orders for all manufactured goods were reported down 2% in January. The real, non-seasonally adjusted decline, however, was 6.96%.
New orders for manufactured durable goods were reported down a whopping 4.9%, which is bad enough. Remove the varnish of seasonal adjustment, and the real decline was from $239 billion to $204 billion, a 14.4% plunge.
The optimists will say this decline was due to worries over the sequester. And, there’s probably some truth to that. They also say we should ignore transportation and defense spending — an argument which has never made the slightest bit of sense to me. It’s also an argument you will never hear when transportation and defense orders surge as they did last month.
According to the Aerospace Industries Association, that industry alone accounts for about 633,000 jobs (about 6% of all mfg jobs) and $224 billion in revenues (17.9% of all durable goods revenues) including $95 billion in exports — 6.2% of all durable goods exports and one of the few success stories in America’s perennially crummy balance of trade picture.
A decline in orders, such as might be expected when, say, the US is trying to reign in spending in the midst of winding down a couple of wars, could put a real dent in those figures. And, these are relatively high-paying jobs with benefits, not part-time Wal-Mart greeters.
Defense spending accounts for about 2/3 of all government spending (federal, state and local) which, in turn, accounts for nearly 20% of total GDP.
Please don’t get me wrong. I’m not arguing that defense spending should be increased, or even maintained. Other than increasing the shamefully paltry benefits provided to wounded veterans, I’d love to see the budget slashed dramatically. It doesn’t take a lobbyist to see we probably spend a bit more on defense than is necessary.
But, when someone suggests we should ignore transportation and defense spending when assessing the country’s economic future, it’s because those components are in decline. Excluding them makes the economy look stronger, just like excluding the long-term unemployed makes employment statistics look stronger.
It’s all about perception.
UPDATE: 12:40 PM
SPX is off its high (1545.25) for the day and trending lower. It’s early still, and it’s likely to be expanded, but the operative channel is probably something like this:
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