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Friday, August 15, 2014

Daily updatre 8/15

Strange day.  Here is the daily SPX chart.

The market gapped up yet again and SPX traded above its 50 SMA for the first hour.  A little after 10:30 stocks sold off and oil, bonds and gold rallied.  This was supposedly on news that Ukraine fired on a Russian military convoy that had entered Ukraine.  I found reports of the Russian convoy entering Ukraine before the market even opened.  Somehow nobody cared until after 10:30.  I can't remember ever seeing a time when the market was so nonchalant about everything.  Isn't that what complacency looks like?  Nothing can go wrong because the market can only go higher, right.  Lets take a look at the futures chart.

The futures closed above the 100 SMA at the 10:00 bar, but ended the day back below it.  That was quite a dip intraday and quite the recovery in the afternoon.  People were not afraid to go home long over the weekend.  No worries mate.  No mater what happens in the world the FED can fix it.  We still need a confirmed close above the 100 to indicate the probability that this resistance will be conquered.

This is the messiest market I have seen since 2007.  The COMPX was within a few points of its all time high this morning.  At the same time IWM is mired below its 200 DMA.  Both of these indexes are considered risk on/off indicators.  What are they saying then?  All bear markets start with some kind of divergence along these lines.  Of course not all divergences like this mean a bear market is coming.  However, I think it would be hard to find instances of a massive divergence on this order not leading to a pullback bigger then 4% on SPX.  I just don't believe we are done on the down side yet.

Back in May SPX stayed in a trading range until IWM got a good rally going off its 200 DMA.  I don't think SPX gets to new high ground unless IWM gets going on the upside.  If it gets clearly rejected at the 200 it could put some selling pressure on SPX again.  SPX traded above the 7/30 low this morning so while it did not completely fill the big 7/31 gap down it did technically fill the gap.

Last night I detailed a lot of resistance in this area.  Today that resistance held.  What happens next week?  I talked a bit about the prior 5 bounces off the 100 DMA also last night.  In all of those instances a close above the 50 DMA led to new highs.  Once the bounce off the 100 started SPX never closed below its 6 SMA before closing above the 50.  With that in mind here is my battle plan.  Work the long side until either SPX closes below the 6 SMA or above the 50 and back below it.  Either of those actions by SPX would indicate it is different this time. 

Wall Street economists point to the strength in Q2 as a sign there is no recession near.  This data table indicates you can't really tell much by that.


This table shows the GDP growth 1 quarter before a recession stated for the last 60 years.  As you can see a 4% print is not really all that rare is it.  Note these are after the revisions.  I suspect the original Q2 print might be revised lower as more revisions come out.  Keep in mind we have never had a quarter as weak as Q1 without it being associated with a recession.  We can see from the data that while Q2 bounced back considerably it is not an all clear that we are not near a recession.  It is normal not to know we are in a recession for 6 to 12 months after it starts when a majority of data revisions are in.  Quite a few consumer related companies are complaining about poor sales.  That just does not seem consistent with the supposedly strengthening economy.  I still have a feeling the economy is not nearly as strong as Wall Street wants us to believe.  I guess we will see.

Last December I showed a chart from John Hussman based on research from Didier Sornette's book Why Markets Crash.  Here is the chart comparing SPX to Sornette's ideal bubble pattern to refresh your memory.

I saw this chart today with the SPX pullback magnitudes on it.


We certainly have the same pattern of ever smaller pullbacks. This means we have bubble valuations combined with a bubble pattern in price.  Maybe it is different this time.  Maybe it is the same.

The market and sector status pages have been updated.  Have a great weekend.


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