In a Q&A; session with Reuters this morning Mohamed El-Erian remarked that:

The confidence fairy has to counter the reality of an economy that still has to de-lever, structural headwinds, concerns about Europe, etc…

The current approach of kicking the can down the road (I prefer rolling a snowball down a hill as it captures the growing size of the problem and its accelerating nature) will not last for much longer in my opinion.

Well, apparently investors everywhere are clapping their hands and shouting “I believe!”  Because the confidence fairy is rising from the palms of Bernanke’s hands, spreading her wings and granting their every wish. 

I was asked last night if the IHS pattern with potential to 1351 would outweigh the Crab Pattern that pointed to below 1300.  I thought no, since it is much smaller.  Yet, here we are at 1355; and, I have serious egg on my face.

So, where from here?  While this rise certainly inspires confidence, it takes us further into a rising wedge that I haven’t talked about much before.  It was lacking in upper TL touches, leaving a lot of white space on the left/upper side.  Although a big fan of reversals dealt by rising wedges, I try to stick to well-formed patterns.

This one is better formed now.  And, judging from both the hourly (above) and the daily (below) charts, it has just about played out.  There are perhaps two more days left before the pattern reaches its apex at — that’s right — 1370.

Will we get there?  No, I don’t think so.  From a fundamental standpoint, I believe all the “good news” is pretty much out there; and, I’m a fervent believer in buy the rumor, sell the news.  Further, the news we supposedly rallied on today is the same old crapola we’ve been fed for months, now:  falsified employment numbers (that’ll be revised next week) and impending “deals” that will make both our and Europe’s problems magically disappear.

We’re also nudging up against the next obvious turning point for this rally — the 88.6% Fib retrace of the 1370 highs at 1357.75.  And, the divergences in SPX are becoming glaring, as can be seen on the hourly chart above.  Put it all together, and it seems to me the rubber band has simply been stretched a lot tighter.  When we snap back, it’ll be bigger, faster and bloodier than would otherwise have been the case.

In my opinion the confidence fairy has a Sisyphian task on her hands.  ECB’s Trichet wants to play let’s pretend.  Let’s pretend that Portugal is okay — because they’re trying really, really hard.  Let’s pretend that Ireland and Greece will be able to someday repay the billions we’ve lent them.  Let’s pretend that Spain and Italy won’t catch the others’ cold.

Juncker says the answer is to create an in-house rating agency, so Euro-zone countries don’t have to suffer from the “irrational” actions of those mean US-based agencies.  Luc Coene chimed in, adding that the downgrades (not the credits, mind you) “are bad.”  Kind of like blaming the sword instead of the pirate using it to force you to walk the plank.

More after the close.

In the meantime, a couple voices of reason (barely audible over the clapping).  From the Fed’s Thomas Hoenig:

Hoenig — who is set to retire October 1 — maintained his argument that monetary policy is not a tool that can solve every problem.  In fact, he said he is concerned that “in working to offset the effects of this devastating crisis and to restore the economy to health, an extended zero-interest-rate policy is producing new sources of fragility that we need to be aware of and allow for in our future policy choices.


“Having seen the effects of financial crisis after financial crisis as short-term policies beget short-term policies, we should know that an ever-present short-run focus, even if well intentioned, is the road to ruin,” he said.


Hoenig warned that the longer the Fed leaves its zero interest policy in place, the more assets will be defined by these low rates and the greater the negative impact will be once rates, inevitably, begin to rise once more.  With interest rates near zero and additional massive liquidity poured into the economy, all interest rates are affected, he said. This has had a knock-on effect on asset values of every kind are also being affected, artificially boost their value. “When — not if –the adjustment occurs, we will see a dramatic drop in values.”

And, more from El-Erian:

The Euro-zone is truly a multi speed economy. Countries such as Greece are struggling mightily due to excessive debt and an inability to grow; and the current policy approach does little to deal with these issues. And who would have thought that a Euro-zone country would have a rating (CCC) that is worse that a country such as Pakistan.  


Portugal and Ireland face similar issues, though the magnitudes are different. These two peripheral countries are already in the Euro-zone’s financial ICU, having both had to resort to bailout packages. And just this week, a rating agency downgraded Portugal to junk status. Again, this was unthinkable just a year ago.

At the other extreme, Germany is doing well. In fact, it has surprised many. It is reaping the benefits of years of economic restructuring and sound liability management. Yet its well being risks being negatively impacted by repeated demands to bail out weaker members of the Euro-zone.  


The question for the Euro-zone is how to reconcile these multiple realities; how to deal with multi speeds in growth and balance sheet dynamics. And it is a question that assumes added urgency given that the political decision to address the peripheral economies’ solvency problem using a liquidity approach has contaminated other important parts of the Euro-zone – most importantly the balance sheet of the European Central Bank. Thus, the concern you cite Brian about the integrity of the Euro-zone, including the robustness of the Euro.

The current approach of kicking the can down the road (I prefer rolling a snowball down a hill as it captures the growing size of the problem and its accelerating nature) will not last for much longer in my opinion.


If it wishes to avoid a really disorderly outcome, Europe will be forced to opt for one of two corner solutions: fiscal union, or debt restructuring and, possibly, a Euro-zone sabbatical for at least one (and possibly up to three) of the 17 members of the Euro-zone.  The more Europe delays this choice — and it is a difficult one — the greater the risk that policy makers may lose control of the situation.

According to the Washington Post, Obama has thrown the sick and the elderly under the balance-the-frickin-budget bus.  At least, that’s how some will paint it.  Others will assert that Boehner has abandoned his peeps (the rich) in order to reach an unacceptable compromise.

As always, reality is somewhere in the middle (and it’s far from a done deal.)  We certainly must reduce our skyrocketing debt — especially before interest rates increase and it takes 482% of GDP to make interest payments alone.  But, we also need to increase our revenues — easier said than done in the midst of a Recession/Depression.

I don’t know what to expect of the markets tomorrow.  Futures are uniformly positive at the moment, with equities, gold and oil all positive (SPX is up 6.75 at 1342.50)  The USD is off a little, but is still trending up.  So, this is good news, right? 

My initial reaction is “so what?”  I mean, was there any doubt that some sort of accommodation would be reached?  If you buy that, then the question is “how does this accommodation compare to expectations?”  Most of us expected that each side would give some ground in order to reach a deal.  From what I’ve read, this agreement looks fairly neutral; i.e., it should piss off both sides pretty well.

Bottom line, I don’t see it having much of an impact.  The real question is “will the deal, if it is in fact reached, make enough of a difference to prevent a financial meltdown?”  The market’s recent rise has occurred in spite of obvious long-term and structural problems with our economy: our competitive disadvantages (labor costs, currency, etc.), corrupt, incompetent and ineffective financial oversight, politicians whose sole aim is serving their donors/masters, a tax system that encourages multinationals to stiff the IRS, and massive levels of unsecured debt.

These problems won’t be fixed by Obama and Boehner becoming golf buddies.  In my opinion, the only real solution to our problems is a massive marking to market of debt and equity in all markets across the board.  Debt investors will have to recognize the losses they’ve already sustained.  Equity investors will suffer even worse.  But, again, when valuations are contingent on the Fed’s continued willingness to pump hundreds of billions into worthless instruments, the losses are already there.  They just haven’t been booked, yet.

Our trading partners will kick and scream, but they won’t have a choice.  They’ll simply be booking the losses they’ve already sustained.  And, where else would they go to sell their stuff?  The dollar will get sketchy for a while but, again, what are the alternatives?  The Euro is dead currency walking, and China has its own problems. 

We’ve pumped trillions into preventing a depression.  It didn’t work.  It won’t work.  Only when the debt goes away can we get back to a sustainable growth model that doesn’t rely on financial trickery.  When/if that happens, I’ll turn bullish.  Until then, not only is this announcement isn’t really “good news.”  It’s not even news.

Today’s action was a mix of misdirection that would make Hitchcock proud.  We were down 10 points early, locked in a channel aimed squarely at 1300.  But, we quickly rebounded and the channel morphed into a descending broadening pattern.  Then, that pattern started tracing out a little inverse head and shoulders pattern that promised a trip up to 1411.  After all those gyrations, we closed up one point.

While the door isn’t closed on the IHS, the pattern we were left with looks a lot more like an inverted roof to me.   These patterns tend to go back the way they came (but not always), so I’m inclined to believe it reinforces our earlier Crab diagnosis.

Beyond that, there was something to frustrate everyone today.  Bulls are no doubt disappointed that, after that barn burner of a comeback, we still couldn’t muster a higher high.  I mean, seriously, folks.  Eight cents is all it would have taken.

And, bears are no doubt disappointed there was no follow-through on the nice early-morning plunge.  Ten points is a good start, but to give it all up on light volume is pretty lame.

My take is that, as today’s doji implies, the market is undecided.  Lots of economic cross currents and uncertainty — but, what else is new?  It doesn’t help that it’s a holiday-shortened week and volume is very light.

The only changes from yesterday’s post are that the put-call ration hooked up a little, indicating a short-term top, and the technical indicators on the hourly chart have more clearly topped and are heading back down — at least for the moment.

We also have a little IHS on VIX, indicating a bump to around 17.80.  VIX was as high as 17.08 on the day and left a slight hook up on the daily stochastic and MACD — a condition that arose but couldn’t last on the daily SPX chart.

Although I follow primarily the SPX, it’s worth noting that the COMP and RUT are similarly positioned re the massive H&S; we’re watching develop.  The only difference is that they’ve already matched their left shoulders, and need only a nudge down to complete the pattern.  COMP’s target would be somewhere around 2315 and RUT about 685.

Also, for the record, there is a smaller potential inverse H&S; setting up on each of the indices.   On SPX, it would require a dip to 1311 and back to 1340 to complete the right shoulder.  I’ll keep an eye on it, but fully expect that any trip to 1311 won’t be a bullish sign.

I continue to expect a sizable downturn within the next week — possibly to 1299 or below.  If we establish a higher high, I’ll reassess.   Initial unemployment claims are due out at 8:30 AM EDT.

Back on June 27th, with SPX at1279, I suggested an upside target of 1322 [Patterns, Patterns and More Patterns.]  At that price, I noted, we would have completed a bearish Crab Pattern at the 3.14 extension of the BC leg.

At the recent high of 1341, we’ve completed a nearly perfectly formed Crab Pattern at a whopping 4.237 extension of the BC leg (an unusual Fib number — inverse of the .236 level.)

The initial target of a Crab Pattern is the .618 retrace of the AD leg.  Here, that translates into 1292.72.  Subsequent targets include a 1.272 retracement of AD at 1242 and a 1.618 retracement at 1214.   (As I mentioned in this weekend’s post, I suspect the initial drop will stall by 1299 in order keep alive the hopes of a wave 5 up.)

These targets dovetails perfectly with my “same as 2007” way of thinking in the near-term, and the resolution of the head and shoulder pattern developing longer-term.  Note the H&S; pattern target indicates 1146, close to the 2.618 AD retracement.

Looking at the hourly chart above, I think we’re about to start that next leg down.  Let’s call it a 3 of (1) of P[2].  We’ve got plenty of possible catalysts: Greece, the Portugal downgrade, coming employment data, the debt limit, etc.

I expect this move down to be fast and powerful.  I added to short positions in SPX and XLF near today’s high and long positions in VIX.  It’s still possible we go up and kiss 1345 for a proper double top, but I don’t think it’s necessary in order for the DT or H&S; pattern to be valid.

Good luck to all.

With all the (justifiable) recriminations aimed at rating agencies post the last crash, it’s more than a little ironic that they’re now being criticized for doing what we asked of them —  telling the truth.

In the past 24 hours, two huge bombshells.  First, Greece is no longer “fixed.”  According to S&P;, the restructuring, even though agreed to, is still technically a default.  The ECB will have little choice but to accept defaulted debt onto their books.

Now comes China, with word from Moody’s that 10% of their outstanding debt may be no good.

Since last week’s stock market run up was credited to the Greece issue being resolved, be prepared for some fireworks now that the picture has changed for the worse.

Friday’s close at just shy of 1340 was purely a function of the way we got there and does not represent a breakdown of the similarities with 2007’s top. 

There.  Got that out of my system.

Am I as confident as that makes me sound?  Ask me after Tuesday’s close.  I’ve spent considerable time this weekend thinking long and hard about extra 10 points the market tacked on last week.  Readers will recall I had a target of at least 1322, but left open the possibility of overshooting up to 1329 or higher.

So, what happened?  In a word, elasticity.  When our trusty government made a move on the oil markets, it threw equities for a loop, too.  As I anticipated in Not Terribly Slick, the pittance we theoretically saved at the pump was immediately overshadowed by a sizable drop in equities markets.

Not only did oil rebound to a higher price within four days (I thought it would take five), but the equity markets rebounded as well.  But, the steady climb I expected (we were so on track) off the 1258 low was thrown off track.

Four days into the rise, when the market had retraced 40.5% of its decline (comparable to 2007’s 48.7%), it should have done the Fibonacci shuffle for a 38.2% pause (34% in 2007).  Instead, it retraced a whopping 77% of its rise, falling from 1298 to 1267.

Not only did this give yours truly a nasty case of indigestion, but it made the whole rebound idea seem somewhat foolish.  For us to reach our 1322 target by Friday, we’d have to gain 55 points in 5 days.  Of course, we did it in 4 — reaching 1321.97 last Thursday.

For anyone who’s ever cracked open a quart of Ben & Jerry’s when they’re famished, it’s easy to understand what happened next.  The market hauled anchor, hoisted all sails and sailed right past the Point of Reason.  Should we have stopped at 1329?  Sure, why not?  But, that was 11 points ago.  It’s time to stop living in the past.

From here, I’m expecting a tumble to around 1299, possibly by the end of this week.  It could go as low as 1286 in this first push, but I’m expecting the higher number simply because it provides the most ambiguity: the bulls could regard it as a corrective [iv] of 1 of wave 5 up.   This market has seemed hell-bent on preserving ambiguity as long as possible whenever possible.

I know, I know.  It’s a short week, and everything points up.  But, I didn’t listen to naysayers at 1298; what makes you think I’ll start now?  It’s entirely possible we start the morning up a few points, possibly kissing horizontal resistance at 1345.  We could even have one relatively flat day as The Force and the Dark Side battle for control.  But, we are heading down — and, soon.

Last Friday’s move is analogous to 5/31, when we printed a big, fat 14-point gain — also above the 50-day moving average.  That day, we also violated another downward sloping trendline off the May 2 high, and the bulls were out in the streets, beating their chests.

The next day, June 1st, we were down 31 and didn’t stop until we’d lost 87 points.  In the 2007 pattern, the market dropped 88 points in the five days following its equivalent of last Friday.  So, don’t think it can’t happen.

BTW, for those looking for more details, I redrew the fan lines off the March ’09 and August ’10 lows to eliminate the candle shadows.  This allows us the extra 11-12 points we’ve already booked.   Additional guidance includes the 78.6% Fib Line (off 1370 highs) at 1346.50 and that horizontal resistance at 1345.20 (double top, too.)  In addition, we’ve reached the limit we established on the daily RSI a couple of weeks ago, and most of the technical indicators I watch on the hourly charts are overbought; many are already hooking down.

I continue to view the latest move up as a backtest to the fan line from the March ’09 lows.  If things go according to plan, we’re tracing out a massive head and shoulders pattern with an objective target of 1146.  We should be down to 1220 inside of 6 weeks or so.  I’ll leave the original forecasted market trend lines up just for grins.

p.s.  For anyone whose kids are bugging them to see the movie Monte Carlo, it’s cute — but not about statistical models, as my daughter had led me to believe.  Just thought you should know.

UPDATE:  July 2, 2011

Friday evening’s subpoena of BofA CEO Moynihan is a great reminder of the many lingering legal problems all the banks still face.  It might give even bullish investors pause about the wisdom of trying to ride the financials any further.

Regular readers will recall I have been extremely negative on the financials for several months now.  From a fundamental standpoint, there is little in the QE-less, higher interest rate world to suggest sustainable profitability is probable, let alone possible.

But three weeks ago, when XLF completed a bullish Bat pattern, I suggested we were in for a rebound (see below).   The pattern called for an upside of 16.55, but I felt the rise would be contained by the channel it’s been in since Feb 18.  Now, it’s closing in on our target and a nearly 7% profit.

There are other reasons besides the channel, however, to question whether XLF can go much further.

First, the fan line it broke through on June1(which had been providing support) is now prepared to pose substantial resistance.  It’s the yellow dashed line below.

Also, at Friday’s high of 15.66, XLF completed a bearish Bat pattern that has a target below 15.

Last, the 200-day moving average looms overhead at 15.69 — 3 cents above Friday’s high.   On the hourly chart, the RSI is well into nosebleed territory.  Along with the histogram and the MACD, there’s an obvious hook to the downside. 

The BofA subpoena announcement came after Friday’s close, so the markets haven’t had the opportunity to react.  Given that, and the technical indicators we’ve looked at, I’m expecting a sharp reversal.   The financials can then get back to that zombie shuffle we all know and love.

ORIGINAL POST:   June 6, 2011

Update on Financials: Getting Off Cheap

If the reported settlement of $20 billion is all it takes to get the banks out of their foreclosure fraud liability, we should see a pop in the financials.

I’ve been watching a bullish Bat pattern evolve in XLF.  While I’m very bearish on the financials (and the market in general), a settlement could provide a short-term boost that leads the XLF and the overall market higher over the next few days.

The pattern targets an upside of 16.55, but a return to the upper end of the channel is likely all we’ll see.

One note of caution for traders: this pattern’s CD leg is currently approaching a 2.00 extension of the BC (1.94 at today’s low.)  Bats can also extend to 2.24 or 2.618, which would result in continued downside to 14.6 or 14.24 respectively.

That would drop XLF out of the channel, which is entirely possible.  Experienced harmonics traders look for a confirmed move in the anticipated direction before placing trades, and place stops to limit the fallout from the 30% failure rate.

UPDATE:  10:05 AM PDT

XLF (currently 15.6) finally joining the action on the upside.  But low volume and a declining ADX…  I think it’s about to get smacked down by its 50 and 200 day moving averages.  Also within a few cents of completing a bearish Bat pattern.  Initial target is below 15 in the next two weeks.  It should remain in the falling channel it’s been in since February, so the upside should be limited to  15.7.  Possibly a little early, but can’t resist initiating a small put position here. August 15’s at .21 are calling…

In the meantime, watching for a good entry point on SPX.  I wouldn’t mind initiating a short position here, but would feel more comfortable waiting for some confirmation — a nice red candle on the 15 or 30 minute chart, for instance….

UPDATE:  7:05 AM PDT

SPX just had the little spurt we were talking about yesterday, hitting 1329.51.   I think that should do it for the upside.

ORIGINAL POST

/DX has been in a falling wedge for a year, now. 

Since early May, however, it’s been stuck in a rising channel.  As can be seen below, they intersect this month.  So, it’ll have to choose.  Staying in the channel means breaking out of the wedge.  Staying in the wedge means breaking out of the channel.

As the longer running pattern, I’d give the nod to the wedge.  But, my gut tells me the channel will provide strong support until either a breakout to the upside or the wedge forces things back down.  Bottom line, the dollar looks to rise for at least the next few weeks. But, we’ll keep an eye on it.

Descending broadening wedge on VIX hourly.  rising wedge on SPX hourly???  negative divergence rsi vs histogram.  Inverse etf, falling wedge. Gartley on SPX daily?  neg diverge on rut/comp/nasdaq.  hitting 50 sma all over the place. overbought.  Right shoulders building all over the place.  vix lower BB.