Slope of Hope

Tonight’s post is dedicated to Tim Knight – fellow bear and ‘friend of the blog’ – who also happens to run our favorite blog called Slope of Hope. Well, who am I kidding – most people reading this probably came directly from his site, as Tim generously allows us to place links to our measly web presence. At the rare chance that you haven’t heard of Tim – go visit his blog (after you finish reading this of course ;-))

Now, there’s a second reason for tonight’s theme, as it aptly describes the general context of where we currently are in the market as well as where we are heading. It has been said that markets ‘slide on a slippery slope of hope’ and ‘climb upon the bricks comprising the wall of worry’. There is a lot of truth in this expression, as history shows over and over again that the human capacity for denial appears to be almost infinite. Maybe this chart will demonstrate the point I am trying to make:

Where is the fear in this market?

So, it’s 2005 and you are sitting in your local watering hole sipping on your favorite glass of lager. Some bloke walks in, buys you a beer, and then starts telling you that he’s got psychic powers and that he can tell you the future up to three years in advance. Just ask and he’ll tell you anything. Of course you don’t believe a word he’s saying but hey, it’s free beer so you play along. ‘Okay, how’s the economy in 2008 and where are the markets heading?’ He responds: ‘We’re in a recession and banks are going out of business one after the other. The Feds are bailing out some of the biggest investment banks to the tune of billions; are printing money like there is no tomorrow, and Freddy Mac and Fanny May are insolvent and are about to get nationalized. Oh, and something called the VIX is below 20’. ‘Yeah right’ you think to yourself – ‘I like free beer but this guy is out of his mind.’ Then you ask him what he’s smoking there…

Seriously, would you have believed that guy a few years ago? Well, I probably would have, but I’m a sucker for tall tales as well as an evil speculator, so to me 2008 would been something to look forward to. After all – when there’s blood in the streets – buy property. But it’s not surprising that most of my contemporaries wouldn’t share my sentiment. Because people want to believe that tomorrow is going to be better than yesterday and that a ‘golden future’ awaits them. If you tell them that we’re heading for doom and gloom they will most likely hate you for it, which is why in the days of kings and queens the ‘bearer of bad news’ was also often the recipient of an untimely demise. Nobody likes a party pooper – especially when it comes to money and the financial markets.

So, where are we? Let’s start with the S&P this time:

Bottom floor, please!

The S&P didn’t put up much of a fight today – although it managed to climb a 1/4 of a percent the breadth at closing was a feeble 1.03:1 – basically on par. As I have pointed out on previous occasions, each consolidation rally (if we can call the last two days a rally at all) is now exhibiting diminishing breadth ratio and volume percentage. Which is exactly what happens in a Minor 3 wave of Intermediate 3 – rapid and accelerating drops interrupted only by short and anemic retracements.

A bit more detail for the EWT nerds.

The hourly chart shows the retracement of the past few days in more detail. It’s a bit premature to count those short term waves accurately but it looks like as if we have been tracing out a 1,2,1,2 pattern at this point, which means that ‘wave 3 circle’ is about to paint it’s 3rd leg down. But there’s of course the chance that we might push a bit more higher, which would be healthy for the bearish case – after all nothing goes down in a straight line. 1287 -1290 would be a possibility here. For the trip down, Berk was so kind to donate a chart with some targets:

Some preliminary targets for the SPX.

Moving on to the Dow – which again was pretty anemic today:

The index that tried to rally, but couldn't.

The breadth in the $INDU (shown below) was 1.14:1 – and it’s possible that we might see a bit more consolidation here. If that happens my target is 11,550, which is the 50% fib line from its prior wave.

The Dow cash index in more detail.

On to the Nasdaq – remember how it was leading the market in the past few weeks? Well, as the saying goes: the higher they climb the deeper they fall:

Nasaq leading in every direction.

I’m skipping the futures tonight and am only showing the cash index ($COMPQ). We measure the $NDX breadth however, which closed at a breadth of 1.94:1 negative – it seems that Nasdaq wants to lead in every direction.

Gold ready to roll over.

Gold made some progress in the consolidation department today and touched my first target of 940, which led me to bulk up on some GLD puts. Yes, it’s entirely possible that we’ll see 960 tomorrow but I’d be surprised to see a push higher than that. As many of you have learned the hard way – the real action in Gold  happens mostly overnight as its futures are now traded almost 24×7. Check out this link:

http://www.kitco.com/charts/livegold.html

What you will see on the bottom on the main chart is something called ‘New York Globex’ and ‘NY Globex’. These two didn’t exist until a few months ago and were added without much fanfare sometime in April, if I recall it correctly. By pure coincidence this also was the very day that a huge Gold take down occurred – overnight of course. Coincidence? Yeah – probably 😉 In any case, we ‘mortals’ don’t get to trade during those owl hours, so when it comes to Gold and its related ETFs such as GDX or GLD you have to make your bet between 8:20am EDT to 1:30 EDT (which is when COMEX Gold closes for the day). My risk assessment here was that puts at this point are defensible as I am expecting a large drop from here, plus I don’t expect a lot more ‘damage’ than 960.

That’s it for tonight -I can’t believe tomorrow is Friday already – time flies when you’re getting whipsawed. Don’t worry, plenty of fun straight ahead – but in order to partake, make sure to get yourself positioned during those up days.

Cheers!