UPDATE:  3:30 PM

I can’t for the life of me figure out why investors ignore chart patterns.  

Someone could make a very nice return on their portfolio by focusing solely on rising and falling wedges.

 
UPDATE:  12:55 PM

UPDATE:  12:35 PM

SPX finishing off a little rising wedge and bearish Gartley pattern.  Should see resumption of selling here at 1148.

UPDATE:  9:55 AM

The sell-off is looking pretty vicious, as expected.  If we follow the 2008 script we should end up somewhere around 1070 — possibly by tomorrow.  But, since wave 3 was stronger than in 2007, it’s entirely possible wave 5 will be, too. 

More later.

UPDATE:  9:20 AM

As I mentioned last night, these figures are going to make cases both for and against QE.   Unemployment, along with business conditions, is getting worse.  But, inflation is also on the rise.  In the late 70’s – early 80’s, we called this stagflation.  But, we didn’t have the same oppressive levels of debt to contend with.  Throw in the debt — with tentacles strangling consumers and governments alike — and the ongoing stock market crash and we have the perfect setup for another depression.

EXISTING HOME SALES:  Sales off 3.5% from June to annual rate of 4.67 million versus expectations of 4.99 million.  This completely negates the increase in pending sales recently reported.  Median prices also fell, coming in at $174,000, down 4.4% from July 2010.  June prices were revised sharply down from $184,100 to $176,100.  Cancellations continue to be a problem, due largely to appraisal and loan issues.

PHIL FED BUSINESS OUTLOOK:  Ugly on a stick, with indicators declining sharply across the board.  Note the special questions on the last page: 30% are planning plant shutdowns or cutbacks this summer.  More unemployment on the way.

INITIAL CLAIMS:  No surprises here.  More of the same bad news, with 408K new claims as opposed to the 400K Wall St expected.  Continuing claims at 3,702K versus expectations of 3,698K.

CPI:  No real surprises here.  The index lags, of course, so energy is likely to fall significantly if/when a drop in oil prices works its way through the system.  New cars are flat, confirming auto manufacturers have no pricing power whatsoever.  Would not want to be long GM at this point.

CONFERENCE BOARD:  Leading economic indicators — has to be considered a puff piece given the contrary data in every other report released this week.

ORIGINAL POST:  12:55 AM

First, an update on our 2007 vs 2011 comparison…

It has come to my attention that EWI has now officially embraced the comparison I first discovered in May.  Apparently they’ve gone from questioning (on July 15th) whether there’s any “forecasting benefit in analyzing this chart” and “haven’t found any price and time relationships between the two moves that would allow a more specific forecast” [see OMG, WTF and Money Back Guarantees]  to “the structures remain remarkably similar.”

It’s too bad they didn’t jump on board in July — before the 200-point move.  Better late than never, right?

ECONOMIC DATA

For anyone who’d like to peruse tomorrow morning’s reports themselves, these are the links that should work.  As always, I’ll try to get at least a synopsis posted as quickly as possible.  But, it might be a busy morning.

CPI:   http://stats.bls.gov/cpi/

Initial Claims:  http://www.dol.gov/opa/media/press/opa/

Existing Home Sales:  http://www.realtor.org/research/research/ehsdata

Leading Economic Indicators:  http://www.conference-board.org/data/bcicountry.cfm?cid=1

Philadelphia Fed Reserve Report:  http://www.philadelphiafed.org/research-and-data/

Also, worth a look: yesterday’s Bloomberg interview with Philadelphia Fed Governor Plosser.

EOD:  11:15 PM

I have a feeling tomorrow’s going to be a busy day, so this is my last post for today.  CPI and initial claims come out at 8:30am (5:30 for us on the left coast), existing home sales, Philly Fed and Leading Indicators at 11:00.  I know things are supposed to be quiet the day before OPEX, but tomorrow could be quite the exception.

My crystal ball tells me CPI will follow the PPI path and be a little higher than most would like — a problem if you’re counting on QE.  Initial claims and home sales might be the counter-argument.  The dollar is firming nicely as stocks sell off tonight, so at least someone agrees with me.

A small H&S; pattern just completed on the futures that indicates a downside of 1157 (1160 on SPX.)  I still view this past week’s rise as a rising wedge that’s being backtested.  The backtest is obviously taking a little longer than usual, but the case is still intact.  As discussed last night, my initial goal on the downside is 1070.

UPDATE:  8:50 PM

Gold’s fundamental picture has been frustrating.  It’s hard to reason with irrational zealots, and I think that’s where gold is, now.  Virtually anything that happens seems to be a cause for it to go up.

Stocks down?  Gold is the safe haven.  Dollar’s down?  Gold is the better currency. Inflation/QE coming?   Gold is the best hedge.  No QE?  Stocks will fall and gold will protect you.  One of those arguments no doubt makes sense while the rest will prove to be utter BS.  But, they can’t all be right.

Seemingly, gold’s only kryptonite is margin increases, another one of which is likely on the way (see the yellow asterisks on the chart below.)

From a tech standpoint, I’m heartened by the narrowing range of the rising wedge. We’re still in backtest mode and have gobs of divergence with MACD and RSI.  Something’s gotta give.

UPDATE:  2:15 PM

What’s behind Target’s fall from this morning’s ebullient highs?  TGT had a great earnings report, right?

Maybe analysts are actually poking around, trying to make sense of the numbers.  They’re right here, for anyone to see.  But, many investors and far too many money managers can’t be bothered.  The thought process goes something like…

Sales were up 5.1%.  That’s pretty good…but, wait, same store sales were only up 3.9%.  Hmm… that’s not so great…but EPS were up AN AMAZING 11.5%!  [call broker to double the order].  Wait, I don’t get it… net earnings were only up 3.7%, from $679 million to $704 million.

Drilling down…drilling down….wait, what’s this?  Credit card expenses were $15 million versus $138 million last year!?!  That’s a huge frickin’ drop.  It accounts for ALL of the increase in net earnings FIVE TIMES OVER!  [call broker, cancel that order].

Credit card delinquencies have been falling nationwide, but the numbers are still pretty staggering.  In July, annualized write-off rates were 7.43% at BofA, 6.64% at Citi and 4.78% at Chase.  AMEX had an industry best 2.8%.

Target’s rate this time last year was 7.8%.  So, how is it they’re currently running 1.0%?  Perhaps the most telling note in these financial statements is the one we tend to skip right over: “unaudited.”

I’m not blaming Target for doing what almost all public companies do.  They’re trying to reward shareholders in an economic environment that’s increasingly challenging.  Given this morning’s increase in PPI, a crappy employment picture and disappearing consumer confidence, this may be as good as it gets.

But, the next time your broker pounds the table about great corporate earnings and wonderful buying opportunities, take a closer look.  Like Target and Staples, there’s usually more than meets the eye.

UPDATE:  11:00 AM

I answered a question yesterday as to how OPEX might affect my market outlook for this week.  Just noticed that the equivalent week in 2008 was also an OPEX week and ranged from a high of 1418 on 1/14 to a low of 1312 on 1/18.  It was a holiday weekend, and when the market reopened on 1/22 it fell to 1274 before recovering to 1310.  Food for thought.

UPDATE:  10:00 AM

The Staples results are typical of the kind of reporting sleight of hand being played on Wall St.  The headline is that profits were up 36%, and EPS jumped from 18 to 25 cents.

Only when you read all the way to the end of the article do you find out that the 1.7% increase in North American sales was 0.1% before foreign currency benefits.  The 15% increase in international sales was actually a 0.1% decrease before foreign currency benefits.  And, $21 million of the $46 million increase in earnings was the result of a tax refund.  The stock’s currently trading at 14.5, up from 12.5 a week ago.

The headline could have read:  Myopic Investors Duped Again

UPDATE:  9:35 AM

It’s ugly as these things go, but I would be remiss in not mentioning it.  There’s a large inverse head & shoulders pattern near completion — seen here on the 30 min chart.  If it plays out, it would indicate potential to 1308.

ORIGINAL POST:  9:25 AM

PPI reported this morning.  Bottom line:  a whopping 7.2% y.o.y. increase in finished goods prices might make QE that much tougher a sale.   The monthly increase was .2% (versus .1% expectations) and the core increase was .4% (versus .2% expectations.)

That 7.2% pales in comparison to an 11.6% increase in intermediate goods prices and a 22.6% increase in crude goods prices.  Apparently, manufacturers are having a great deal of difficulty passing increased commodity costs along down the processing food chain.  This reinforces the data reflected in the Empire Mfg report just out.

It’ll be interesting to see if higher prices pass through to CPI due out tomorrow.

LAST NOTE (MAYBE):

Couldn’t help noticing all the registration notices floating past on TOS Live News just now.  For some reason, insiders don’t seem all that bullish on their own stocks…

Lots of talk about the McClellan Oscillator (MCO) today.  For anyone interested, here are the relevant points:

Note that we’re in good shape in terms of a suitable place to take a little plunge.

ADDITIONAL NOTE:

Obviously we’re extending both time-wise and price-wise compared to 2007/8. The price aspect makes sense, this being P3 and all.

The time aspect is a little thornier. I take it to mean there is more second-guessing as to what’s going on. After all, we’ve been here before. There is a huge amount of disbelief/denial that we’re going through it all over again.

It’s been 17 trading days since the 1346 interim high on 7/22 (the equivalent 2007 date was 12/26.)  Back then, it took 18 days for the market to hit bottom.  If the pattern continues to take a “little longer” than in 2007, we should expect wave 5 to play out sometime this week, possibly even tomorrow.

If, thanks to OPEX, it doesn’t happen till early next week — that’s okay, too.  I won’t start freaking out unless we bump up past 1258 without reaching a new low first.

As far as targets go, I’m hoping for but not counting on a huge downdraft.  This could all be over as high as 1070.   The rally, probably the result of a Jackson Hole pronouncement, should be pretty quick.  If it follows the 2008 pattern, it would take us back most of the way to 1258 within 7-10 trading days.
 

ORIGINAL POST:

Setting aside the economy for the moment, how do we look relative to 2007-2008?   I’ll focus on three key price moves.

(1)  The first major move down off the top.  Here, the time was almost identical, but 2007 was the greater percentage move by a substantial margin.

                                   2007                              2011            

                        10/11 – 11/26/07                5/2 – 6/16/07
                                  31 TD                             32 TD
                    1576 – 1406 (10.8%)        1370 – 1258 (8.2%)

(2)  The corrective wave back to the interim high.  The 2011 move took several days longer, even though the percentage move wasn’t as great.

                                   2007                              2011            

                        11/26 – 12/11/07                 6/16 – 7/7/11
                                  11 TD                             14 TD
                    1406 – 1524 (8.4%)        1258 – 1356 (7.8%)

(3)  The initial collapse.  This is the 28th day since the 1356 high, which is the amount of time it took to reach the 2007 low.  And, the percentage move has been significantly greater.  But, it appears to be unfinished relative to 2007.  That is, there’s no discernible 5th and final wave yet.

                                   2007                              2011            

                        12/11/07 – 1/23/08                   7/7 – ???
                                  28 TD                             28 TD ?
                    1523 – 1270 (16.6%)        1356 – 1101 (18.8%)

If the pattern holds, it seems to me the final wave down should begin right away.  There are plenty of potential catalysts, as PPI, CPI, initial claims and existing home sales all report in the next two days.  In addition, there could very well be additional follow-through from today’s action in the Euro-zone markets.

The SPX chart appears to be trending bearish again, as this past week’s rally seems played out.  We had a good start with the breakdown and backtest of the rising wedge and two intra-day bearish Gartley patterns.  In any case, we’re no longer oversold.

If we can resume the downdraft by tomorrow, my initial target is 1070.

 UPDATE:  3:30 PM

SPX trying to come back, but completing another bearish Gartley pattern intra-day.  Should reverse by 1198.

 

UPDATE:  11:50 AM

SPX completing a little Gartley, in the process of backtesting the rising wedge.  Next move should be down.

UPDATE:  11:15 AM

SPX, gold, DX all seem to be completing small degree corrective waves at the moment.

ORIGINAL POST:  3:45 AM

The “healthy” Euro-zone economy, Germany, just laid an egg.  From Marketwatch:

“The German economy grew 0.1% during the second quarter after adjusting for seasonal effects, according to data from the nation’s federal statistics office. Compared with the second quarter of last year, gross domestic product rose 2.7% after adjusting for price and calendar effects. Growth during the quarter slowed sharply from the 1.3% reported for the first quarter and was also below the 0.4% rate forecast by economists polled by Dow Jones Newswires. Economists had been expecting an annual growth rate of 3.1%. “

I know I sound like a broken record, but folks, this is ugly on a stick.  For the past several days, the markets have been buoyed by the notion that the ECB could make Euro-zone’s debt problems magically disappear by applying the same QE fairy dust that’s proven so effective in the US.

But think it through…   if the problem is too much debt in the first place, how in the wide, wide world of sports could more debt ever possibly solve the problem?  Sure, if we had rapid growth, the debt might gradually shrink as a percentage of GDP, etc, etc, etc.  But, does anyone see any real growth on the horizon for Europe or the US?  This report is essentially saying “don’t hold your breath.”

Speaking of China…   here’s a fascinating article on its housing bubble.  Anyone who envisions China coming to the West’s rescue should take the time to read both parts I & II.

Lastly, an update on the 2007 v 2011 comparison…

He’s calling this a “technology VC bubble,” where new venture-capital money is paying off old money almost akin to, in his own words, “a Ponzi scheme” or “an old chain letter.” 

He also opines on diversification (for idiots), his latest stock investment (SPY puts) and governmental effectiveness.

See the video here.

UPDATE:  3:15 PM

The dollar decline seems to have run out of steam.  DX has run into support from the fan line we’ve been watching (red dashed line), and now has the opportunity to follow a rising TL back towards the falling wedge boundary.

UPDATE:  2:10 PM

Between the rising wedge, multiple bearish harmonics patterns, fibonacci target, horizontal resistance, an important trend line, the round number and significant divergence…

…that should just about do it for the upside.

I’m taking bets on how much longer CME will wait before raising gold margin requirements again.

UPDATE:  9:40 AM

This looks like an overshoot on the Google/Motorola euphoria this morning.  We’re up past the harmonics targets and there’s obvious price divergence vs RSI and MACD.

Lowes’ drop in year over year sales and a continued moribund NAHB report have much more to say about the “recovery” than Google’s acquisition.

I expect a reversal very soon.

ORIGINAL POST:  9:00 AM

An ugly Empire State Mfg Survey…  If there’s a ray of hope in here, I don’t see it.  Business conditions, orders, prices, inventories — all lower.

The only index that improved was employment.  But, the increase is simply the result of employers drinking the economic recovery cool-aid.  The percentage of employers that anticipate laying off workers in the next six months is on the rise.

More later.

UPDATE:  12:40 PM

I’ve been undecided about one aspect of the 2007=2001 pattern for most of the past week.

The price drop we’ve experienced is obviously much greater in percentage terms than in 2007.  Yet, the pattern of chop we’ve seen is exactly the same.

Throw in the harmonics patterns I discuss below, and I think we’re on the cusp of another big leg down.  I’ve been expecting it to happen this afternoon, but maybe it’s not until Monday.  For those of you looking for an exact date, think late in the day on January 14, 2008.

I realize it’s not terribly obvious from the daily chart, which still looks a bit on the oversold side. That’s the only thing keeping me from being 100% certain.   But, the shorter term charts are shaping up nicely.   There’s also a nice divergence between the rising prices and falling volume.

UPDATE:  12:05 PM

Gartley, Crab and Butterfly (adding here in yellow) all completing at 1186-1191…could be big!

UPDATE:  11:35 AM

Hadn’t noticed this before, but the bearish Crab pattern (in purple) we just completed yesterday also completed a bearish Gartley pattern (white.)

The .618 XA retrace on the Gartley would have been 1172.19; SPX hit 1171.77.  The .786 CD leg should have hit 1190.97; it hit 1188.64.  The 1.618 extension on the Butterfly indicated 1185.59.  These are very precise patterns, and in this case they were nailed.

As I always say, there’s no guarantee on these; they’re right about 70-80% of the time.  But, when I see two very well-formed patterns nestled one inside the other, it’s a very good indicator that 1190.97 will not be exceeded today in any meaningful way.

BTW, it’s interesting that this tug-of-war is happening at the same price level as a large gap formed on December 1, 2010.

UPDATE:  10:30 AM

Here’s the Reuters/Univ of Michigan Survey of Consumers press release.  Pretty dreadful.

 

UPDATE:  10:10 AM

Gold is off 11 so far, but the potential is much greater.

A reminder:  the Butterfly pattern that completed a couple of days ago [see:  All That Glitters] calls for a minimum .618 retrace of the DA leg.  While not guaranteed to happen, it’s worth noting that such a mild retrace would take prices down to 1506.  A typical 1.618 retrace would indicate a downside of 1250.

UPDATE:  9:40 AM

SPX completed a bearish crab pattern yesterday at the 161.8 extension.

It also completed a rising wedge pattern, reaching about 80% of the way to the apex.  Both contributed to the 16-point reversal at the end of the day.

I’m viewing this morning’s run up as a backtest of the rising wedge until proven otherwise.  If the crab plays out, we should give up the 14 points we just gained and then some.

The crab argues for a return to at least 1138 (the .618 retrace) and possibly the 1.618 extension at 1076.

More later.

ORIGINAL POST:  9:30 AM

Link to retail sales report: 

SPX rallied nicely off the bullish Gartley completed yesterday. 
 

For anyone not convinced that harmonics work, take a look at where it reversed —  .22 from the D point indicated by a Gartley pattern at the .786 Fibonacci level.

Like many, I have been trying to make sense of the structure of the market over the past week.  We declined farther and faster than in 2007, and most significantly, without much of a pause at the lower end of the regression channel.

I’ve been undecided as to whether the rebound should adhere to percentage or absolute price moves.  The fact that we’ve stayed in a trading range — albeit a 70-pt one — for the past several days has further complicated things.  It’s been nice for day-trading, but I’d be more comfortable with a sense of when/how we’ll break out.

I’m leaning toward regarding the past week as the equivalent of the Jan 7-14, 2008, meaning this is our big bounce back, and we shouldn’t expect any more.  I’m not certain about this at all, but we are completing an obvious rising wedge and a bearish crab pattern on the day. 

More later.

UPDATE:  1:50 PM

So far, so good on GC.

UPDATE:  12:00 PM

SPX very quiet after falling off 45 points in the opening hours.  Looks like it’s trying to get the c leg of wave 4 going.

GC has had what looks like a blow-off morning.  It looked like it was going to complete a triple top, then quickly shot up for another $20, only to quickly reverse.  It continues to show a great deal of negative divergence on the hourly chart, not to mention a bearish rising wedge.

Just a reminder:  it’s completing a bearish crab pattern inside a larger bearish butterfly pattern [see: All That Glitters.]  We’ve seen from DX this morning the kind of powerful reversal that butterfly patterns can generate.

DX turned exactly on the internal trend line we were watching yesterday.  It’s highlighted here as the red dashed line.

Backing up a bit, we can see this is actually a fan line from the Mar 09 top.

And, last, the 60 minute chart.  Note the turn at the TL and the powerful reversal that butterfly patterns can create.

ORIGINAL POST:  3:15 AM

This corrective wave [iv] should run out of juice somewhere around 1229.  Failing that, the upper limit is 1255.  Wave [v] down should be gentler than [iii], possibly reaching only a bit lower — say 1089.

More in the morning.

UPDATE:  EOD

GC climbed 62 points to 1782.50 today, completing a bearish butterfly pattern and then establishing an intra-day double top.  Post the Fed announcment (with no QE) it fell 56 to 1717 before closing up 26.  It was an impressive reversal that reinforces the notion that investors were counting on QE to fuel the next spike.

ORIGINAL POST:

I’ve been watching the divergence setting up on gold’s hourly chart for the past week or so.  It’s getting pretty extreme, leading me to believe something’s gotta give.

In addition, the bearish butterfly pattern (on the daily chart since May 2) has extended to the 2.618 level, and the smaller, nested bearish crab pattern (on the 60-min chart since Aug 4) has extended to the 3.14 level.   If these patterns were to play out, the correction could be impressive.

A garden variety .618 retrace (of DA) would indicate a 200 point decline to 1533.  A typical 1.618 retrace would take gold to 1263.

It’s important to note that butterfly patterns can end at any extreme Fibonacci extension of the BC leg.  Although the most typical ones are 1.618, 2, 2.24 and 2.618 (where we are now), it’s possible we’ll extend further.   The 3.0 extension is at 1807 and the 3.618 at 1878.  So, stops make a lot of sense.

Getting away from the technical picture for a moment… it seems the entire run up has been predicated on the certainty of a declining dollar.  It’s an easy scenario to believe, since the Fed has so thoroughly trashed the dollar in previous rounds of QE.

And, they could certainly try it again.  We’ll know soon enough.  But, if they don’t, this is one very over-extended puppy.  I like the risk/reward very much — not enough to bet the farm on, but definitely worth a shot.