It has been a while since I updated the broader market but after the events of the last couple of days I felt that I would throw my hat into the ring and give you my analysis of what might be occurring as well as give you some technical levels to watch in the broader market, namely the Dow Industrials.
Last Thursday we saw cracks in the recent up-leg in the markets start to widen as the market was spooked by the FED’s minutes that showed that many FED members wanted to end QE sooner rather than later. The economic data seems to be strengthening in the United States which leads some market observers to hypothesize on the continuing nature of the Federal Reserve’s very accommodative policies.
For the record, before I get into the technical analysis as I see it I want to state that over the course of the last two days the market was given what it wanted to hear from Ben Bernanke. He knew very well that based on recent events that the stock market wants to correct and wants to move down and in fact was on the verge of breaking down violently. In the Federal Reserve’s way of doing things to appease staunch bulls and the shills over on CNBC who panic on any red days and cheer the markets on with pom-poms out in full force (even having the childish audacity to place an DOW all time high clock on their news ticker .. talk about video game mentality) Ben came out in his testimony and reaffirmed that the FED has no intent of backing out of QE anytime soon. Well, Ben Succeeded in stroking market participants and telling them what they wanted to hear; that the FED will remain accommodative for the foreseeable future.
I am in disagreement with much of what was reported in the mainstream media that purported to lay the market’s decline on the election problems in Italy. That news was known well before the last hour of trading and it was in fact within that last hour of trading that the market’s decline became significantly accelerated. In my view, there is something bigger brewing. I am of the view that the market has put in place a lasting top and that we may be seeing the final corrective rally off Monday’s 200 point decline. Remember that a correction doesn’t imply that the market will move down every day. These bounces are normal after 90% down days like Monday produced. The VIX had a massive move Monday, something I cannot ignore. Recall when the VIX collapsed $4.00 in one day at the end of 2012. That event coincided with the market’s rally that has been in place since that time, a rally that has seen the DOW tack on 1100 points in an almost vertical fashion in less than 2 months. In fact, the DOW has tacked on 1600 points since November 16. Of course, this insane rally is barely questioned on CNBS errr CNBC but notice what happened when the market corrected Monday … they all looked like deer caught in headlights.
In any event as I stated earlier, Italy accounted for only a fraction of that selling. The market needed to peg the selling that was really attributable to “froth” to some sort of news event and Italy was just the news item. The reality is that the selling started after last week’s FED statements and regardless of how Bernanke tries to sugar coat the reality that the market needs a breather, last week’s FED Minutes are really leading this move.
As is shown in the charts below, I believe that the DOW has put in place a “broadening top” formation. This formation appears at the end of an up-move and starts to sport spikes and dips that ‘broaden’ (as the name suggests) to make somewhat of a megaphone shape. There are two requirements that form the basis for this pattern. That is, that both trend lines are touched at some point during the pattern’s formation. With yesterday’s close on the DOW, the pattern is now confirmed and in play.
Why do I favour the bearish potential? Simple. The market has had a staggering climb since the start of the new year. It needs pause. Secondly, we seem to run out of gas every time it looks like we are going to motor above 14,000. Thirdly, the market has been acting wildly of late (look at the VIX) and it seems investors are getting nervous at these levels, using rallies to distribute paper. Distribution usually precedes a correction. Lastly, while the action of the last week or two has been inconclusive in some respects, it has allowed the broadening top to be confirmed because both trend lines have now been touched putting the pattern in play.
Lastly, take a look at the following 3 charts of the 60, 30 and 15 min timeframes that all show that the DOW has formed a topping head and shoulder formation. This formation is bearish if confirmed and even more so if formed at the top of any prolonged rally. The first chart is the 15 min time frame, the second is the 60 and the last one is the 30.
These next couple of trading sessions are going to give us real direction on the short to intermediate term market outlook. I favour the bearish count and have entered DIA 138 puts and April 136.
I do believe if we see another test of the 138 level, the market will move down in rapid impulsive manner. If the market breaks above the upper trend line on the broadening top I will close all shorts and re-evaluate.
This post is not a recommendation to buy or sell any security and is strictly my own opinion.
