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This Just In!!!

The Orange One delivers a 60-second pep-talk on his cordial and highly productive talks with President Obama.

ORIGINAL POST:  3:00 AM

I have a confession to make.  Two weeks ago, I plagiarized the title and intro of the post: Stay Groovy.  Okay, so technically I plagiarized myself.  I originally used it the morning of June 1, 2011 on the old Blogger site to describe a situation that seemed pretty dicey.

On May 31, after 3 straight daily gains, SPX had tacked on an additional 1.1% and appeared to break out of a well-formed channel.  Rumor was the Greece debt crisis was nearly resolved (glad we don’t have to worry about that anymore) and financials partied like it was 1999.  From the CNBC daily recap:

  

Most everyone, it seemed, was suddenly bullish.  Truth be told, even I still had one foot in the bullish camp, wondering if SPX still might go up and tag the .786 of the 1576-666 crash at 1381.50.

I posted the following commentary:

There are plenty of tripwires ahead in the economic data due out this week.  Will they blow up the market, or simply result in another QE airstrike?   May as well call your bookie and bet on whether QE3 is coming….While I think there’s some upside potentially to the 1380 level, I wouldn’t bet the farm — especially from these levels.  I remain much more concerned about the downside.  Stay groovy.

Here are the vitals from the end of the day, May 31, 2011:

• SPX nearing the Fib 61.8% retracement from the 1370 top, still down 1.9%
• every bank stock shown above gapped up on the day
• an established channel had been broken in a way that surprised vis-à-vis 2007

Turns out that the channel in question could be interpreted two different ways.  The red channel was indeed broken, but the purple one was still intact, thank you very much…

 

…which meant that the channel break-out everyone expected was quickly and painfully reversed.

“Okay” you say, “lots of nice information.  But, why do I care?”  Let’s examine yesterday’s vitals:

• SPX reached the Fib 78.6% retracement from the 1474 top, still down 1.8%
• every bank stock shown above (except HBC) gapped up on the day
• an established channel was broken in a way that surprised vis-à-vis 2011

Reaching the 78.6% Fib retracement yesterday wasn’t a huge surprise — after all, S&P upgraded Greece (at least we don’t have to worry about that anymore.)

Like May 31, 2011, every bank stock (except HBC) gapped up on the day.  But, although SPX is up over 100 points (nearly 7.5%), most of the banks are still sitting at or below their May 31, 2011 price levels.

BAC and WFC are the exceptions, but they are rapidly running out of real estate.  Most of the other charts look something like the following:

How about the broken channnel?  Until last week, the red channel was apparently in control.  SPX pushed up through it, then back-tested and took off.

But, suppose it’s the white channel that really matters?  Suppose the fiscal cliff solution (that seemingly everyone expects) never materializes, or housing starts are horrid, or the euro zone suddenly lands back on our collective radar?  Suppose DX and EURUSD both complete their Bat Patterns tonight or tomorrow?  Suppose the recent break-out…wasn’t?

When I start asking rhetorical questions in the middle of the night, it’s probably time to turn in.  I’ll leave readers with one last chart that anyone who’s been following our analog might find interesting.

continued for members…

UPDATE:  10:00 AM

BTW, the above chart compares RSI for the May-June 2011 top to the Sep-Dec 2012 top.  My charting software allows me to choose 2 or 3 days as the charting period, but not 2.4 days — as our analog requires.  So, this chart uses 2 days, which smooths the curves out a bit (using 3 days smooths things too much.)

Note that in the 2011 case, daily RSI is wedging a bit through Point #4.  That is, the top fills the channel perfectly but the bottom starts pulling away — until the upswing takes over and Point #5 is established.

In 2012, Point 3 is more pronounced.  More importantly, there’s a deeper drop after Point 4 — completely fleshing out the channel before the Point #5 upswing.  In both cases, Point 5 is a clear back-test of the broken channel — lending credence (Creedence?) to the downside case getting underway here at the .786.

UPDATE:  11:00 AM

Going back to the June 1, 2011 post last night was very helpful.  The headlines might be different this year, but the sentiment is eerily similar.  I don’t know how the fiscal cliff situation will be resolved, but I have seen very few negative predictions.  In other words, it’s a very crowded trade.

UPDATE:  2:10 PM

Apparently Boehner is giving a press conference in a few minutes — 2:15 EST.  Sounds like things aren’t going well, or it would be a joint conference with his buddy Barack.

UPDATE:  2:16 PM

That was… scary.  I don’t think the market will see much reason for optimism given the Great Orange One’s tone.  Anyone want to buy some stocks?

UPDATE:  3:50 PM

Of the list of “suppose [insert bearish event]…?” floated six hours ago, we’ve got some winners.

The EURUSD completed both Bat and Crab Patterns at the tip of a well-formed rising wedge. Nice reversal candle, too.

Anyone catch the Zerohedge article on EURUSD, which is trading 1000 pips rich to the swap fair value?  Apparently it’s a 4 standard deviation divergence (i.e. something’s gotta give.)

DX tagged the .886 I mentioned earlier, which also happens to be the price level of the recently broken falling wedge.  Also a nice reversal candle.

VIX got a strong bounce off the purple channel bottom.

Just about all the banks turned down — too many to chart.  It might have something to do with the craptastic housing report.  I know, on the face of it everything looked only slightly soggy.  But, dig into the numbers and you see that most of the growth was due to apartments, not single family homes.

Been saying this for years now…the US economy will not recover until housing recovers.  Period.  Nice Robert Shiller interview on CNBC, which played him off the air as he was trying to say we might be stuck in a slow economy with not enough buyers to support prices.

Interesting graphic on BAC from Zerohedge , points out that delinquent mortgages total over half of BAC’s market cap.

Going into the close short.

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I can’t seem to find a live CCR recording to serve as today’s theme song, so this one will have to do…