Why So Serious?

Wall Street is going soft and I have a ton of charts to back it up. Bottom Line: After four years of endless bailouts and quasi unlimited QE cash traders across the board as well as investors have adopted the mental fortitude of an out shape boxer on a cookie dow diet and a matching waistline. Of course when you let yourself go you lose your edge quickly.

And like on the street when it comes to staying ahead of the game there usually is a price to pay. A new guy shows up and takes over your territory. It may not happen tomorrow, next week. or next month. But based on what I’m seeing some change is on the horizon. A great example was my previous post today (yes, I have been a busy bee) in which I highlighted how fund managers across the board just sat through an 18.5% correction in AAPL without lifting as much as a finger. They just sat there and took the loss. That’s great work there hotshot – I personally know house pets that would do a better job at managing my money. And at least they’re genuinely excited about those fishy treats.

But nothing shows the level of complacency among investors like the SPXA200R – the percentage of symbols on the SPX trading above their 200-day SMA. As you can see the threshold for buyers has been moving up steadily and is now in the 70 percentile. That’s a far cry from just a year ago when it was somewhere around 20%. Now on the sell side of things there’s not much play left. We dropped from 95% last year to about 80% now. Perhaps we go back to 95% and I have it all wrong but that still leaves the fact that investors have forgotten how a meaningful correction feels like.

While we’re on the subject – here’s the NYSE version but in this case it’s a 50-day SMA vs. 200-day SMA ratio. A break lower usually seems to happen below the 1.0 mark. And we are talking bad breadth here and it’s not due to poor dental hygiene. The moral of this story: If you only have a handful of symbols maintain your index then you’re in big trouble once they start disappointing.

As you may recall we painted a nice divergence at the top which finally managed to trigger gravity. I think medium term this leaves the door open for a more meaningful correction – more on that below.

NYSE up vs. down volume – here we are now in what I call ‘end of minor correction’ territory. Again, I’m going to cover this in more detail below, so stick around (and perhaps buy a subscription).

NYSE advancing vs. declining issues. Obviously the quality of the recent rally left a lot to be desired and we have been painting a monster truck size divergence since after August. Now we are back in the bounce zone despite the fact that we dropped – what 60 SPX handles? Better call the suicide headline – this is clearly considered a major correction these days.

While many investors are expecting a correction and a b-line back to new highs post election market makers – usually the smarter guys on the trading block, seem to remain cautious. Note that the ratio has remained on the low side. If this keeps up despite a bounce then we may get a repeat of what happened earlier in April – a bounce followed by a more extended sell off. I’ll keep my eye on this one, no worries.

JNK vs. TLT – that’s actually one of the more bullish charts on my watch list. Sitting on a solid support line and has barely given up turf. So a bit of a mixed bag across sentiment/momo charts.

But my point stands, which is that investors seem to be rather complacent and oblivious to the cracks that are apparent across the board. And by cracks I mean lack of participation, lack of momentum, degradation of breadth (i.e. internal strength), inability of overcoming important resistance levels (remember the volume hole?), and now non-confirmation over in commodities and on the Forex side.

And of course failure to recognize selling opportunities, which implicitly translates as blind trust in the presence of eternal buy interest. Let’s also not forget the point I made via my AAPL post – a complete lack of short interest after systematic destruction of the bears over the past four years. And that can really bite you in the butt if things are getting thrown in a tail spin. If you think 2008 was bad then think again – at least back then the bears were alive and well and ready to take profits at important inflection points.

So let’s talk equities and where they may head next. Some of you may recall one of my favorite (and probably most simplest) of my LT charts. That weekly stochastic has been spot on for several years now and once again it did not disappoint. What is it saying now? Well, over the past four years we usually have seen a quick push above the 20 mark (our long trigger) but until that happens we may experience more red candles.

My SPX point and figure it out chart apparently has not seen enough blood as it’s pointing at 1380.

That would put it near the 25-week SMA on my weekly panel – I don’t see any long term support ahead of that.

If you recall – just a week ago we received a bonafide VIX signal, and those have rarely failed us since the 2009 low. And it looked like a pretty safe bet until Friday when a juicy first day of month candle up was followed by a complete wipe out. Now, for the record, unless we breach SPX 1402.92 that VIX buy signal remains valid. So Gandolf is providing a valuable service here as it shall not pass indeed. For if it does then we’re going to 1380 and perhaps much lower. On the daily panel shown above we now have a NLSL line up with the 100-day SMA. I think that makes a perfect buy/sell threshold. Above that I want to be long but as soon as we lose it we may be heading into uncharted waters and I would be betting on some red.

A lot more where that came from – let’s look at some P&F and more long term charts. They don’t call me the hardest working mole on Wall Street for nothing!

Here’s a recent favorite of ours – gold – we often seem to be catching it the right way and I hope we can keep that up. As you can see we are now near the 100-day SMA and that means it may try to plant at least a temporary basecamp here.

The weekly shows support near 1660, so if 1670 fails that would be my next candidate for a bounce.

Of course the P&F has to be more bloodthirsty again as it’s insisting on 1560. What’s this, the Spanish inquisition? Frankly I find that a bit pessimistic but given the level of complacency among gold bugs (they must be talking to the ones in love with AAPL) I won’t rule it out either.

Crude has been a sucker for punishment and it seems there’s nothing in the way until about 80 when we may run into some lower weekly BB boundaries. Near that is a monthly Net-Lines sell level (NLSL) at 82 – incidentally at the right end of a rough diagonal support line (sorry for not painting that).

Of course the P&F won’t have any of that and is insisting on 77 as our bearish price objective. It’s evil and I like it – that would be a great level to look for a long entry. In the meantime I will remain short until about 82, after which I’ll re-evaluate my options (pun intended).

Copper looking equally poignant and let’s not forget that it was warning us about equities in early fall. It’s now trading below its P&F target and I don’t see much that would put a stop to it, at least right now.

Here’s the P&F – the price objective has now been fulfilled that means it’s officially in technical no-man’s land.

But not all is lost. The EUR/USD however has suddenly turned into my favorite LT setups of the week. On the weekly we dropped below diagonal support and it also seems that all that monthly resistance looming above has been holding strong – frankly we didn’t even get near that NLBL in the past four months.

And here’s what I’m so giddy about: A brand spanking new double bottom break down on the FXE just triggered on Friday. Possible price objective: 124. Suffice to say that this greatly pleases the mighty Mole as he’s earning in Dollars and paying bills in Euros now. That’s right, I’m going to show that Euro-trash who’s boss!

But that’s not all! Here’s the long term FXY panel which now has us below the 100-week and at the drooping end of the lower 25-week BB.

And as coincidence may have it the Yen also triggered a triple bottom break down last Friday. Price objective – wait for it… all the way in the basement near 118.2. Now that would be a nice X-Mas present, so let’s watch the EUR/JPY, the EUR/USD, and all the rest for some nice entries this week.

Public Service Announcement: I have been working like a dog this weekend and besides the two posts I spent a lot of time continuing my development on the NinjaTrader version of the Mole indicator. I’m a bit too exhausted for a long winded update but in a nutshell let’s just say that I’m discovering exciting new patterns and that great things are in the works for 2013. So stay tuned – I’ll keep you guys posted on all fronts.

Cheers,