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Rally Didn’t Negate Technical ‘Kiss of Death’

By Rick Ackerman Posted on June 10, 2011, 2:23 am EDT Last Updated June 13, 2011, 1:09 pm EDT

Because the stock market has just received the kiss of death technically speaking, traders who are looking to get short should view rallies like yesterday’s as a gift.  Notice in the chart below how the S&P 500 exceeded three prior lows without an upward correction. It would have been bearish enough if the selloff had breached only two prior lows, since that is all our proprietary Hidden Pivot Method requires to signal a trend change. But by exceeding a third low for good measure, sellers revealed their eagerness to be out of shares before summer begins.  In the meantime, let’s hope the bullish hubris continues for another day or two, since it could set up the fattest trading opportunity bears might see for a while. (Want to learn how to predict swing highs and lows yourself — with amazing accuracy? Click here for information about the upcoming Hidden Pivot webinar.  Or here for a free trial subscription to Rick’s Picks, including access to a 24/7 chat room that draws veteran traders from around the world.)

According to the Wall Street Journal, stocks rallied yesterday because the economic news was moderately encouraging. We know better, though. It was more a case of the day’s flatulent economic news seeming moderately encouraging because stocks were rallying. The news item of the day — not counting the salacious one about Rep. Anthony Weiner’s formerly private life (and private parts) — concerned an unexpected contraction in the trade deficit in April. That’s good news, right?  In fact, the trade deficit declined a whopping 6.7% because Americans are buying a lot less oil. And while that may be good news for the global-warming crowd, it is ominous news for the economy, since it suggests that soaring prices for an essential commodity are beginning to severely impact household budgets.

‘Just a Soft Patch’…Not!

Even so, eager as ever to see the glass as half-full, the Journal soft-pedaled the stock market’s ongoing correction from the April 29 high as relatively mild. “The Dow is now only off 5.4% from its April 29 high, making the six-week correction a relatively restrained one,” noted Wall Street’s newspaper of record. If yesterday’s rally turns out to be the beginning of a major upthrust, they’ll be right, the correction will have been mild. We doubt that that will prove to be the case, however, given the strength of the bearish “impulse leg” shown in the chart above.  We’ll give Charles Plosser, president of Philadelphia’s Federal Reserve bank, the final word nevertheless. Plosser called recent weakness in the economy just a “temporary soft patch,” and opined that growth should resume and strengthen going forward. Considering the source, that sounds pretty scary to us.

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  • A. Ran Fand June 11, 2011, 5:28 am

    Rick, you may know this guy. Chris Martenson’s The Crash Course: 45 Minute Version. Very interesting take on the future. Maybe sooner then we think? http://www.chrismartenson.com/page/crash-course-one-year-anniversary

  • ricecake June 10, 2011, 9:23 pm

    The oil producer countries prefer to keep their black gold under ground than pump it out cheap. That’s their offsprings’ life liquid. Besides they need lots of money to keep their people inside the country in peace. They are not stupid. Everyone on the street now knows Peak Oil.

    Since U.S is attempt to default, at least has very strong intension and already doing so, China and other foreign Treasuries holders are dumping the Treasuries and invest the dollars in holding in the U.S companies instead. Meaning Stock market will not crash.

    • mario cavolo June 11, 2011, 2:46 am

      …ring the bell for ricecake. Chinese will, make that is already, more and more investing in the USA as the value of U.S. assets, real estate, currency, stocks move in relation to one another…its going to be a helluva shift of asset ownership over the next 20 years.

    • SD1 June 11, 2011, 11:13 pm

      You might be on to something ricecake. Exchanging US currency for a stake in US companies is not so far-fetched.

  • Bam_Man June 10, 2011, 4:29 pm

    BTW, didn’t someone famous once say that “inflation can remain transitory longer than you can remain solvent”?

  • Bam_Man June 10, 2011, 4:27 pm

    With all due respect to Mr. Plosser, with oil stubbornly hanging around the $100/bbl level, there is virtually no chance that the economy’s “soft patch” will prove transitory.

    When oil has dropped back to $70-$75/bbl, I might be tempted to reconsider my position.

  • gary leibowitz June 10, 2011, 4:07 pm

    I agree. I see a sharp 2 to 3 day drop from here. I believe we have entered into a long bear trend but expect one more rally starting mid-week before the bottom falls out.

    Watch the dollar. I do believe it will surge from here. Not sure if it is temporary trend or long term. Sounds counter intuitive considering the mess we are in but I see much messier situations in Europe.

  • John Jay June 10, 2011, 3:40 pm

    Mario, I believe each crude oil contract changes hands about 30 times during it’s life. Gasoline refineries are running at about 82% of capacity I believe. You are damn right it is all under control, and actual supply and demand fundamentals don’t enter into the equation at all. The Federal government is a wholly owned subsidiary of the corporate oligarchs, so they operate with impunity more and more. However, charts don’t lie, but you need to be on the job from Sunday afternoon to Friday afternoon to stay on top of things to make money. At least you get Friday night, all day Saturday, and half of Sunday off. At least with the US time zone and the CME Group, I don’t know about the Asian markets trade times and time zones at all.

    • ben June 10, 2011, 9:29 pm

      Say what you want about the oil technicals…I avoid that discussion. To me technicals are a bunch of voodoo and when they turn out to predict something it’s only because everyone believing it would happen made it happen. And you always have people whispering in the background about contrary indicators when obvious technical patterns don’t pan out.

      But to rip the fundamentals of oil…now that’s simply absurd. First off the Earth’s population is growing at a pace of 200k new souls a day. Every day, another 200k people are becoming oil consumers. Furthermore, every day the quondam third world (India, China, etc.) becomes a little bit closer to becoming peers of the Western world. People who once were content riding bikes, now want to drive in cars. People who were once content to eat salted rice daily are now demanding steak once a week. People who never strayed more than ten miles from the house they were born in are now demanding to travel and fly and see the world. And this description applies to countries comprising a majority of the world’s population.

      And add to this all the tumult in the oil producing regions. A war with Iran is inevitable…the only question is when. The rest of the Muslim world is in open revolt against their allegedly Western sympathizing leaders. Again…supply squeezes in the future is all but a certainty.

      And still WTI is about $20 per barrel below Brent crude, and Americans pay about 1/3 as much as our European counterparts for gasoline. If anything, it looks like crude is being manipulated down, not up. If you want to tout some chart to justify the belief that US crude is going to 85, then go ahead. But don’t think for a second the the fundamentals are on your side.

    • mario cavolo June 11, 2011, 2:34 am

      ….nice set of points Ben, thanks much. Let me add one more. The weekly, even monthly range and spread of the price trading in oil seems quite wide – around $30.

      So I’ll suggest that’s due to the speculative traders, folks who are in the asset only to make money, nothing to with fundamentals, no interest in the oil itself. Like me, for example. We want to catch the momentum of a short term up or down, and in the process the momentum can take that price on a life of its own which as you well said, has nothing to do with fundamentals.

      If you think about crude as the basic commodity that it is, the price wouldn’t and shouldn’t be fluctuating so wildly on a daily basis. Yet crude will unnaturally rise to $110 o unnaturally decline to $80 , where it “doesn’t actually belong” based on fundamental demand (fair value?) , but based on whether it breaks through a key price point on a chart to the upside or downside. Then that move follows through another $15 or so until the smart money traders are satisfied they’ve wrung out most of their profits on the trade and start unwinding their position to the weak hands.

      The situation has gotten so bad that many of what Rick calls the impulse legs are nothing but short squeeze type reactions by traders jumping desperately into and out of positions. This is a reality of the markets, and so technical chartists know that and use that information to their advantage in trading to increase the probabilities of a profitable trade.

      In this context, I couldn’t care less about oil really. It could be a currency or gold or olive oil or peanut butter for all I care. I do however care very much now whether it drops below 98ish on the chart because if it does, its much more likely to be going to 90 or lower and my puts will then make money on that $8 move in a week’s time, all of which has zero relation to the fundamentals.

      Damn straight that here in China demand for crude is skyrocketing, the auto party is just getting started.

      Cheers, Mario

      thanks, Mario

  • Mikey June 10, 2011, 3:27 pm

    Rick, I enjoy reviewing your analysis.
    I notice that your data points (#3, #2, and #1) represent higher lows. I am curious how the Lower Lows from May 5, May 17, and May 25 play into your analysis

  • C.C. June 10, 2011, 8:08 am

    Just makes the job of the Federal Reserve that much easier when the time comes – in fact, it will serve to underscore the ‘need’ for further stimulus, thereby taking some heat off the chairman and perhaps even elevating his status, as perverse as that may seem. Watch it play out, and watch how quickly the news outlets shift their position to welcoming further stimulus as the pain of a necrotizing market sets in.

    The Fed chairman likely has a smirk on his face for all the heat he’s taken. Now he’s going to give the naysayers just what they wanted, in the form of taking the punch bowl away until the attitude adjustment and its associated pain reach a level worthy of his forgiveness.

    Should be big fun to watch –

  • Cam Fitzgerald June 10, 2011, 5:48 am

    Good call Rick. I am seeing a nasty correction coming in waves for the next while with even many commodities taking a bath. Ignore it your peril is my mantra for the time being.

    • mario cavolo June 10, 2011, 11:27 am

      Hi Cam!

      Agree too, but….where’s my decline in crude?…my puts are dog meat right now. I’m being particular on that issue because I know beyond a shadow of a doubt that crude will dive a few days after my June 18 puts expire!…pieces of the market are so egregiously fudged and manipulated its a tough, frustrating game to win. There are myriad multiple signs of economic slowdown on both sides of the Pacific yet crude is hanging around at 102?…its ridiculous and the world can NOT afford it. Guilty that I have no patience. Meanwhile, you hit the nail on the head last week when you said that QE3 can ‘t come now, they have to wait until more serious declines settle in first.

      Enjoy the weekend, Mario

      Enjoy the weekend.


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