Today has actually been a very busy day, I've had a lot of member emails and have been eyeballing the market. I prefer to not look for a day or so (as in Saturday) so I have fresh eyes and my perspective is more open to seeing what is there.
I want to start with a few things I noticed last week and thought were odd. Of course one of the biggest events was Q2 GDP which came in at 1%, slightly below the consensus median of 1%. This was followed by the text of Bernanke's Jackson Hole Speech at 10 a.m. All week and the week before we heard from numerous Wall Street investment banks about how the Jackson Hole Speech was a dead end for the market. If Bernanke came in with too small of a QE3 amount, the market would be disappointed and sell-off. If Bernanke swung for the fences and put out a huge amount on QE3 the market would be spooked by this and think things were worse then they thought and sell-off. If Bernanke disappointed and didn't do enough, the market would sell-off. I raised the issue I believe last week that Bernanke was likely to surprise everyone and the comparisons that everyone is making between 2008 and now and Jackson Hole 2010 and now were simply not relevant. I even paraphrased Mark Twain, "History doesn't repeat, but it does rhythm". I also mentioned that before the last FOM meeting, expectations of some form of QE3 were very high, with some commentators even saying that Monday morning the Fed would announce an emergency program even before the FOMC meeting. What did Bernanke do, virtually nothing except to guarantee banks more free money through 2013, and the market's reaction?
The market put in the typical knee jerk reaction heading lower and then reversed and ended the day up significantly and went on to bounce 7.5%.
Bernanke has been known for carrying a fairly big bat and swinging late at the pitch, but his recent non-policy announcements (except ZIRP through 2013) have not had the immediate effect that Wall Street has been telling us, which has been parroted by the main stream media. It seems Bernanke is up to something.
I also found it strange when Obama was criticized for reaching out to Warren Buffet to talk about the economy and unemployment on Tuesday, August 3rd. However, 48 hours later, Buffet takes a $5 Billion dollar position in one of our most ailing banks, BAC (Bank of America) who is certainly on the TBTF list with reach into 1 of 2 American's lives.
The next day (white arrow) BAC was trading up 10.95 %-so much for Wall Street not trading insider information! The day after on Aug 25th, Buffet announced he had taken a $5 Billion dollar position in BAC and the stock gained another 9.44%. This is certainly a token investment considering BAC's liabilities, but I think clearly we have to look at the supposed call about the economy with Obama in a new and more appropriate light. These kinds of decisions aren't made overnight. Buffet obviously heard something that gave him confidence and I think we all know that the market isn't going anywhere without financials. Remember that Buffet was approached by then Treasury Secretary Hank Paulson about taking a stake in a floundering Lehman Brothers, which Warren was hesitant about, he's always been hesitant about getting involved with financials. However Dick Fuld saw Buffet's offer of something like $40 a share to be an insulting fire sale price. Of course we know what happened to Lehman, but I think Bernanke learned a lesson then, sentiment can cascade out of control and create self-fulfilling prophecies. I don't see Buffet's investment as anything more then token support of BAC and I wonder what the Fed really said to the big Wall Street banks at the July 29th meeting and what Buffet was told in his conversations with Obama and whoever else he may have talked to.
Bernanke is certianly not giving ground and the expectations that have been set for QE3 have come from Wall Street, remember the July 29th meeting and I think it's fair to question what was really said, look at the market the following Monday after the meeting between the PD's from Wall Street and the Fed...
The meeting was the Friday marked by the white arrow, the sell-off really got its legs the next Monday. Some speculate Bernanke needed the market to fall to give political cover to QE3, but twice now he's had the chance to introduce or even hint at QE3 and twice he has refrained and done nearly the opposite of the expectations that WALL STREET CREATED (except to lengthen and give certainty to ZIRP interest rate policy and to lengthen the September FOMC meeting from 1 day to two).
Back to Buffet, Warren has had some misplaced investments of late, while $5 billion may not be a lot considering BAC's liabilities, I think Buffet doesn't want another misstep, I doubt he entered in to this agreement on a whim and one has to really wonder what Warren knows that the rest of us don't especially in light of Bernanke's recently policy response or lack of it. Bernanke understands that consumer and business confidence is key and for 98% of Americans (less the business side), all they understand of the market and thus the economy s the headlines in the papers and on Drudge Report,
"The Market was down an eight consecutive day with losses of 600 points in the Dow". With BAC in such a delicate spot, the last thing the Fed needs is a bailout of BAC and anything that looks like it could create a self-fulfilling prophecy and bank runs is certain to be taken seriously. I doubt for a second that Bernanke didn't learn some painful lessons and still bear the scars of the Lehman Debacle where sentiment literally fed on the company, whether it was able to be saved or not, the self fulfilling prophecy ripped Lehman to shreds faster then otherwise would have been the case, a similar situation in BAC would be unthinkable.
A week ago on August 17th, I said the market was going to have a dramatic sell-off in the next two days, that Friday being August options expiration. In a post about what to expect the next week (last week) thought we would most likely see a formation similar to a small double bottom or a "W" bottom. My expectations were 90% that we would see a downside head fake of that second bottom. You see a "W" bottom or a double bottom according to technical analysis should see a second low that falls just short of the first low (shallower), so a head fake making the pattern seemed like a failed pattern made perfect sense.
As you can see, my expectation of a "W" bottom in the market has fallen short.
This is exactly what I expected on this chart of XLF (Financials), not only the pattern was correct, but a two day head fake below support and a move up off that head fake.
IN ADDITION...
I find it unusual, but the daily 3C SPY chart is showing a fairly strong relative positive divergence and honestly I didn't expect to see this, I thought the action would be contained to long intraday charts. It's not just the SPY...
The same signals are found in the DIA
As well as the QQQ-both of which also demonstrate a symmetrical triangle.
While the above is more geared toward intermediate term analysis, I've created some confusion with members. I've had more then 1 email saying something like, "You were the biggest bear and told us that this break in the market was coming and now that it's here, you're talking about the market as if you are a bull?"
It's true, I've been bearish on the market for sometime, in fact since 2007 when the pundits were still on CNBC screaming for Dow 20,000. Back then I did 1 5-part video series taking a look at bubbles going back 4-5 centuries and all in-between and came to the conclusion that before this is all over and done with, the Dow will probably be n the 5,000 area and we will see the first secular bear market in equities. I still feel that way and I think the next shoe to drop will be something like we have never witnessed, the Fed an only kick the can down the road so far and only stack the house of cards so high, but that doesn't mean we are surely at that moment and the market is always looking to throw you a monkey wrench. So let me show you what I see as a very valid possibility.
Recently I've noted accumulation taking place in the Dollar Index, it's of a long term nature. Right now the Fed is throwing a lot of money out there to keep the Euro trading above the $1.40 level and weaken the dollar, but this can't go on forever and someone knows t and is taking what I think is a long term position in the dollar (remember the dollar trades inversely to the market). Take a look at this daly 3 chart of the Dollar Index.
Note the 2009 accumulation n the Dollar Index that lasted about 6 months, it sent the DI almost 20% higher, toward the end of that dollar rally the S&P lost about 16%, through most of it the S&P was lateral. That was about six months of daly accumulation. We are now at about 3 months of daily accumulation, I don't see this as an imminent move in the dollar, in my best guess scenario, the market moves up a bit on a head fake, the dollar will move down some more and be accumulated, by the time the dollar s ready to break from accumulation to mark up, we should be at the area of the market's "Second Shoe to Drop".
Here's UUP (an intraday proxy for the Dollar Index) on a 60 min chart...
This shows a brief accumulation period sending the dollar higher, about the same time the market was falling, but overall, the 60 min 3C chart looks like the dollar wants to move lower and accumulate some more. Remember that accumulation is almost always n to lower or flat prices, distribution s almost always n to higher or flat prices. So hopefully that gives you an idea of what my bigger picture outlook is and that the recent analysis has been geared toward what is happening next in the market, not where we end up eventually. The big picture is also why I feel we will have unprecedented trading opportunities as most of the technical traders out there still have not adapted to the internet, the first to adapt to a secular bear market is going to do very well.
Lets look more closely at Friday's action for a moment...
First it should be said that this past week was the first time in a month that the market has posted a weekly gain, that's a little bragging rights for the market considering the recent sell-off. Volatility is running exceptionally high right now on an intraday basis at 3.5% which is about 3x more then it's been this year. In addition options have shown a decrease in expected correlation over the next 3 months, high correlation is often bad news for the market and one last note, Mutual Fund outflows started to dry up last week. Some of this information fits pretty well with my best guess scenario.
Of the Dow Stocks, only 1 closed down for the week and for obvious reasons, Travelers Insurance (TRV)-with that hurricane spinning off the coast it's not much of a wonder.
As for our 239 Morningstar Industry and Sub-Industry groups, 232 of 239 closed green for the week. For Friday specifically, 235 of 239 closed in the green. However, the Dominant Price/Volume Relationship showed tones of weakness for the day.
All NYSE Stocks
All Dow-30 Components
NASDAQ 100 Components
Russell 2000 Components
S&P-500 Components
As you can see in each of the averages the dominant Price/Volume Relationship was Price Up/ Volume Down; this is the weakest P/V relationship of the 4 and usually signals traders are backing off from chasing prices higher. Of course we always have to look at the P/V relationship n context and a few factors influencing it at this time would include the uncertainty about the Hurricane and Fridays traders are usually loath to hold positions through an uncertain weekend, still I find it to be a weak relationship.
Lets take a look at the averages and 3C... We already saw the daily charts so we'll look at some intraday charts.
Remember, the longer term chart, the longer term the implications, shorter term charts have shorter term implications, but if they are consistent in a divergence, that divergence will spill over in to the next longer term chart, making it more important. Red arrows=negative divergence/ Green arrows - confirmation or trading in line with price and White arrows=positive divergences. If the 3C indicator is in a red box it indicates a leading negative divergence, in a white box, a leading positive divergence. Leading divergences are more powerful then the arrow type which are relative divergences.
Above s the 15 min chart of the DIA, you will see a couple of repeating themes through all of the averages and timeframes, one s the slight head fake and negative divergence as prices moved up in to a negative divergence at the yellow arrow. Note there s a slightly leading positive divergence in the DIA from Friday on the 15 min chart, this could potentially build as the week goes on.
DIA 10 min chart (shorter timeframe charts will show more detail as well) Here's another common theme, the accumulation on 8/19-8/22. On this chart the 10 min is showing weakness Friday afternoon, the lows near the open were accumulated and toward the afternoon as the market gained, there was distribution,
DIA 5 min chart-Again the accumulation on on 8/19-8/22 and the head fake negative divergence at the yellow arrow. Again you can see a negative leading divergence Friday afternoon.
DIA 2 min chart, the head fake is seen in yellow and the opening gap down is accumulated on Friday with weakness in to the close,
DIA 1 min-some 1 min charts are showing very late, end of day positive divergences, it's possible we open to some strength and see weakness develop from there, it will really depend on what the 1 and 5 min charts look like around 10:30-11:00 a.m.
IWM 15 min chart shows some overall bullish action with the recent double bottom-lime test showing a higher high in 3C or a leading positive divergence, even though there are some relative negative divergences in the intraday price trend-again see it at the head fake in the market at the yellow arrow.
IWM 10 min chart shows what I was talking about with accumulation on 8/22, the negative divergence at the head fake in yellow and a slightly leading negative divergence Friday afternoon,
IWM 5 min chart, basically the same as above
IWM 2 min Agan the head fake is notable and there's another hint of some very late day strength at the white arrow.
QQQ 30 mn chart, I thought this chart stood out as 3C is in a leading positive divergence even though prices are not the same as the highs earlier in August, remember, this chart has more import for the bigger picture then the shorter time frames.
QQQ 15 minutes, basically showing the same thing as the other harts, but the more pieces of the puzzle that fir, the easier it is to put the picture together. Note the weakness in to Friday afternoon trade.
QQQ 10 min showing the same thing and probably the clearest picture of the main themes of the market this week.
QQQ 5 min showing pretty much the same with late Friday weakness
QQQ 2 min chart is showing that very late day bit of strength pop up from no where, it will be interesting to see if this continues.
QQQ 1 min again showing that late day strength in the more detailed charts along with accumulation on the early weakness and the head fake at the afternoon attempted breakout.
SPY 15 min chart also showing a bit of a leading divergence on the second "hump" and Friday afternoon weakness.
SPY 10 min chart
SPY 5 min chart and the head fake as well as earlier accumulation in the week. Interestingly, this chart is trading about n line with price on Friday.
SPY 1 min also showing accumulation in the morning, weakness in the afternoon and some sudden strength at the end of the day.
If had to guess, I would say the market is likely to break slightly below the support line of the triangle mentioned earlier as a head fake, should the 10-15 min charts shape up, I would expect an upside breakout after the head fake downside breakout. This 1 min end of day strength apparent on some of the charts is interesting too, remember, accumulation has to start somewhere and that is on the 1 min chart. There wasn't a lot of range this week so the signals are not as good as f we had seen a sell-off or a breakout, maybe this week we'll get more acton and some clearer signals as to where this market intends on going.
Before I wrap it up, here are a couple of sectors with interesting charts.
XLE-Energy 60 min chart, a very nice leading positive divergence on an important tmeframe
XLE 15 min chart- Again, another leading divergence on an important timeframe.
XLE 5 min-a leading divergence on the 5 min chart-this would imply that perhaps there will be some early strength tomorrow with a weaker dollar, which would generally be equity positive.
XLF-Financials 15 min chart with a double bottom that saw a lower low with an impressive 3C positive divergence
Other then the gap up being distributed, there's been some recent positive action in an important industry group.
Once again, that late day 1 min positive divergence on Friday and look at the overall 3C lows connected!
XLK-Technology Also had a "W" bottom with an impressive positive divergence on an important 30 min chart.
Once again, that late Friday 1 in 3C strength that materialized
If we look at the Euro/FXE, it looks like it's bracing for a move higher, which could mean a lower dollar and an equity positive environment.
