As expected, the Shanghai Composite index encountered pocket resistance on the weekly chart.  Despite major news outlets decrying the 20% drop as the beginning of a bear market for China, it is actually a healthy pullback after a total gain of 109% from the November lows.  This pullback can be considered the handle of larger cup & handle formation – this setup was also encountered in the March 2009 lows.

Examining the daily chart, it appears that 2,750 will be a very crucial technical level to establish itself as a short-term floor.  This is where pocket support should come into play on the weekly time frame, and it a test of the rising trend line from the 2009 January – March spike lows.  It is also a 50% Fibonacci retrace of the advance from the March low.

This is a follow-up to the March 10 wolfewave setup in the financials.  They are now at target levels after a remarkable week.  Technically, this is the first solid lift above the daily 20 exponential moving average.

US Dollar index update – the setup which was first flagged on March 3 as the dollar was retesting its 2008 spike highs has indeed produced a clean pullback.  It is now approaching target levels – and as expected, dollar-denominated equities / stocks / commodities have lifted nicely in response to movements in the foreign exchange markets.  With the Fed action expected today, I believe that the target levels will be met around 85-86.  In the larger context, this will be an inverse head & shoulders pattern in the making.  A day to book profits in short dollar positions (long EUR AUD) after the Fed announcement in any late surge.

7:00pm update – Wow.  The Fed announcement that they would be buying up to $300 billion in long-term goverment bonds sends the dolllar into a hard tail spin, ending much lower than the projected wolfewave target.  At this juncture, it has pulled back exactly 59% of the previous swing high on the daily chart.  Interestingly enough, this is the same percentage at which the swing low was recorded on the weekly chart in mid-December retracement.

A follow-up to the March 12 setup – markets have now retraced to the January spike lows around 800.  The Advanced GET software is suggesting that a 5-wave advance has completed on the hourly charts.

If there was ever a time to lift the markets, ahead of the Thanksgiving ‘Black Friday’ shopping escapade would be ideal.  The dollar relief valve is used to give the appearance of a market rally – all things being equal, a -2% drop in the worth of the greenback is nicely balanced against a +2% rise in the indicies.  The dollar has broken a rising trendline following a 4x knock breakdown. Keep a close eye on the S&P 500 as is approaches the breakdown pivot at 840-845 for any signs of resistance on intraday basis.  Does past support morph in overhead resistance?

“In the 1920s, a firm called First National City Bank started repackaging bad loans from Latin America and selling these to investors as safe securities. These investments collapsed in grand fashion after the 1929 stock market crash and eventually led to a new wave of securities regulation. National City Bank became Citibank, which in turn became a major unit of Citigroup.

Heavily involved in the government’s negotiations with Citigroup is Timothy F. Geithner, who is scheduled to be named President-elect Barack Obama’s Treasury secretary today. Geithner is president of the New York Fed, which is Citi’s primary regulator.”  – U.S. Offers Citibank Expansive Safety Net, Washington Post 11/24/2008

Trading into resistance.  The S&P is rebounding right into the bottom of the descending triangle pattern shown on the November 15 market update.  The Dow Jones Industrial average is finding resistance right around 8,400 which represents the 200 month moving average.  On an intraday basis, a 3*push higher series with overlapping wave structure gives warning that the bear market rally may stall here.

Another wolfewave pattern presents itself into the final trading hour.  Commodities have rallied across the board, and the market recognizes much of the gains are balanced against a weak dollar, now down over -2.6% intraday.

“What is black, white, and red all over?”  - stupid American riddle

The answer to the riddle posed most often elicits the automatic response “A newspaper” from Americans, but that is just a twist on the English language that doesn’t translate at all to French, German, or any Asian language.  Many times, reality can be deceiving - in fact, sometimes it is a downright lie.  Such is the nature of perception, and the media often can twist the truth so far that we mistake it for the ‘real deal’.

 

MaxPain

Next week the markets will once again face options expiration.  October’s expiry resulted in an unsustainable lift in the markets that served the main purpose of killing some rather fat put premiums.  Given the technical juncture with the Dow Jones Industrials resting exactly on the 200 month moving average, we must expect some type of artificial lift to present itself.  Will this be billed as another relief rally by the CNBC squawcking heads, or just another side trip on the path to purgatory? 

In any case, the name of the game for this week is MaxPain.  The boys over in Chicago will do their best to flush out any remaining value in the fat puts once again.  Individual stocks can be traded to a given ‘peg value’, but the real action in markets can be speculated when examining such exchange traded funds (ETFs) as DIA, SPY, and QQQQ.  Just be aware of a series of smoke and mirrors as gyrations early in the week will most likely be head fakes, followed by violent swings towards established options peg levels.

 

Bucking Bronco

Where is the most likely source of a relief valve?  The dollar index.  A gap down on Friday on retest of the measured move target of 88 gave an ever-so-slight warning signal.  Foreign exchange traders should keep 92.53 on the radar; this level was 2005 high experienced as the Bush administration continued to depreciate the greenback in order to give an appearance that the markets were soaring to ever-higher levels.   A -28% drop in the dollar over the next three years was nicely balanced against a lift of +25% in the S&P 500.  In the end, it all evens out very nicely as the markets barely were able to tread water when measured against the underlying currency (and prevent the overall buoyant bull party mood from being spoiled). 

Expect the same gyrations in foreign exchange markets to balance against any expiry lift.

 

Goosing the Banks

Why is Bearnake desperately trying to put a floor beneath the banks?  As an avid student of the depression era, he is most likely attempting to avoid that which he so much fears, and effectively short-circuit the sector rotation model which normally prevails during ‘normal’ business cycles.  Money managers who have seen this before continue to play a defensive game, constrasted against Bernake’s offensive (pun intended) actions.  He is trying to lift the sector which normally signals an economic recovery sequence, with very little success.

This chart shows how markets attempt to anticipate the future, and often proceed any meaningful economic recovery by about 6-12 months.  An excellent read can be found at stockcharts.com based on Sam Stovall’s S&P’s Guide to Sector Rotation.

As far as the overall market direction, I believe that traders would be best served to look no further than the Nikkei which topped in 1989, was followed by a booming housing bubble as interest rates slowly dropped, yet had to fight against a deflationary period for the next decade under the burdon of bad debt which was hidden in Japanese bank balance sheets. Heck, in America we learn from others’ mistakes, right? Maybe, but it certainly won’t happen at the lightening speed expected from our short attention spans and certainly the US doesn’t have the luxury of a 17% savings rate experienced at the stock market peak. Quite to the contrary, Americans are buried under a mountain of debt, negative savings rate, and are just now adjusting their future expectations. Time to send out a real S.O.S. signal.

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