Welcome To Crash Season (Sort Of)

So here we are again – looking for mysterious omen portending a change in market direction – anything that would get us out of this nasty summer induced wood chipper of a tape. But behold – there’s a light at the end of the tunnel. Welcome to the month of August! Yes, we are officially in the three month cluster also referred to as Crash Season among (the few remaining) bears.

The other good thing about August? Only one more month until September – when NFL season kicks off! Yes, I’m a man of simple pleasures 😉

I only have a handful of charts this weekend and you may jump to conclusions and think I’m taking it easy. Nothing could be further from the truth – as a matter of fact I have been sitting in front of my desk staring at charts for the past three hours, started right after breakfast. Unfortunately most of my momentum/sentiment charts are still in complete limbo or don’t show anything that would give us any important hints. Thus I choose to be silent and only share what I think will give you an edge in surviving next week’s tape.

First runner up – my NYMO:CPCE ratio chart – plotted as a 13-day SMA plus to add insult to injury I slapped a MACD on this monstrosity. Don’t worry – it’s the only ‘exotic’ chart I’ll post today. Now, it’s encouraging to see that we are pushing into pretty oversold territory down on the MACD panel. Last time that happened we just came out of a violent snap back after the November 08 completion of Intermediate (3) of Primary {1} – aaaah, the good old days.

I know it doesn’t look like much of a push back but you had to be there (many of you probably were). And in typical retracement/correction style we burned through MACD momo pretty fast. Juxtaposed with the recent rally up we have barely seen any price advance considering this flip in extreme readings. After all – we pushed from a -25 to a +20 reading in two months flat. But if you look carefully you’ll notice that the push up started when we were still sort of dropping. And if you look carefully you realize that the MACD cross over to the upside starts slightly ahead of the pattern we are now counting as a Minor {2} corrective flat. Isn’t that interesting?

And that’s another way one could count what happened in 2008 – and quite to my surprise the levels at which that pattern started was even less oversold as the one we painted in late May. So, what’s going on here? Obviously something that does not have a precedence going back to 2005. What we are clearly seeing right now is an increase in extremes which may be caused by a narrowing of market participants. And that is clearly not healthy. Neither does the recent swing up look like anything resembling long term bullish to me – the pattern is corrective and highly emotionally charged. Seems to me market participants are fighting hard to ‘bring back the good ole’ days’ – but thus far equities have made little progress since last fall. Which by the way was a huge disappointment for the bears – it’s just fair to point that out as well. Better luck this time?

Next is my CPCE Deluxe chart. Not that it’s anywhere really interesting right now, but after driving me nuts by pushing sideways around the 0.65 cluster it finally dropped to 0.6 late last week. Quite frankly, I would love to see this thing near the 0.57 range as 0.6 still leaves plenty of space for another push to the upside in equities.

A little more medium term copper is still calling the shots quite nicely. And I’m sorry to say that it’s still pointing up – which casts additional doubt on the short term bearish market theory. I think it’ll come around – literally I may say – but until then it may lead equities a little bit higher.

The daily Zero is leaving the door open for a drop next week. But on the slightly smoothed panel (in the middle) we are still hovering above the zero mark. I would love to see higher prices in equities accompanied by a drop through the zero mark right here. In the past year at least there was always a delay between a drop through the zero mark and equities actually following suit. Which is also why I think that Soylent Green still has pretty reasonable odds today.

And that brings us to the count. First up – I don’t think anything good for the bears is going to happen unless we drop through that ‘magic’ 1088 mark on the SPX. We had three touches on that sucker and it will act as support – mark my words. Soylent Green hits its inflection point at the 1123 mark and I reckon many remaining teddy bears would throw the towel at that point.

About throwing in the towel – my prior comment about ‘not having made much price advance’ may be met with cynicism when looking at the greatly battered premiums on your long term puts (if you are still holding any). Of course volatility (and thus vega) has been taken to new optimistic liberties and if you put the SPX in context with the VIX than things look quite a bit different:

The blue line is the SPX:VIX ratio – and the golden line is the SPX pure. Now, doesn’t the blue line look quite a bit different? Look how low we dropped in April/May – we almost retraced 50% of the entire rally since Dec 2008 (again, relative to the ratio). And since then we’ve come up 50% of that drop – which is why your puts are feeling rather nauseous right now.

As a side note: That ratio chart would also support that Minor {2} flat count which is the rationale behind Soylent Green.

Bottom Line:

Many bearish pundits are proposing that Minor {3} of Intermediate (1) of Primary {3} is now in session and that we are about to roll over in a big way. Frankly – I am not so certain – yet. Although I cannot discard this possibility I do believe that more upside remains a real possibility here. Most of my momo indicators (not shown today) still leave room for upside in equities and the Dollar is also still in the process of bottoming. The slow conditions during the remaining weeks of summer plus the time cycles I also follow suggest that a final push into Soylent Green needs to be expected. That doesn’t mean it’s obligatory – but the message here is to plan for the worst and welcome any bearish surprises should they present themselves. Which means – until 1088 is taken out – stay hedged or at least be prepared for one last bear squeeze.

Like I said earlier this year – only once we breach meaningful support lines which hurt the bulls should we start betting on the downside. If you choose to be the early bird – make sure you can live with the consequences of being wrong for another week or two.

Long term – this market is going to fall off the cliff – just to be clear. I have very little doubt about that and it’s just a matter of time based on the price/momentum pattern of the past three months. But don’t forget that the bulls are running the show and will use any trick in the book to push this thing higher – so don’t anticipate and let this market tell you that it’s ready to turn. And as of right now – I don’t see many telltale signs just yet. Nothing is really screaming bearish at me. This may change soon – and if things work according to schedule it may happen later this month.

Until then – stay frosty!

Cheers,

Mole