June 2012

There's always risk in drum-rolling a potential Mother-of-All-Bear-Rally-Tops, since Mr. Market can sniff hubris a galaxy away. Still, the sonoabitch has little chance of even bruising us, let alone causing us serious pain,  provided we initiate any top-picking trades on charts of lesser degree. For this task, I have asked for chat-room help, since spotting the perfect opportunity will necessarily require paying close attention to price-bar minutia that will become tedious quickly.

As the Great Recession drags on, albeit without official sanction, each and every silver cloud of economic news continues to harbor a dark lining. Most recently, amidst the mainstream media’s hubris over a supposedly stabilizing housing market, we read yesterday in the Denver Post that the region is bracing for yet another painful round of foreclosures. “Despite reports of a thawing housing market,” the paper noted in a front-page article, “yet another wave of foreclosure appears to be looming.” The fact that lenders are gearing up for this is apparent in the sharp spike in deed-of-trust assignments in Colorado. Compared to 2011, they’ve more than doubled in the first five months of this year.  Deeds of trust convey ownership rights of mortgages and the ability to foreclose on them, and they are therefore a reliable indicator of foreclosure activity to come.  According to the Post, if only half of the filings become actual foreclosure cases, foreclosures could spike to 2007’s crisis levels. We have long predicted that home prices would eventually fall by at least 70% as debt deflation ran its course globally. This would imply that, despite the unprecedented drop in residential real estate values since 2007, residential values in the U.S. are only halfway to a bottom. Meanwhile, spotty signs of recovery in the housing market have caused the news media to hallucinate about the return of  good times, In Las Vegas, for one, home prices have fallen to levels so low that even real-estate pessimists would have to concede that there are great bargains to be had:  three-bedroom homes with swimming pools for $100,000, according to a friend of ours who lives in such a home herself. She paid $325,000 for it, though, and although Nevada’s underpriced housing will be a long-term plus for the local economy,

If Papa Bear has indeed come out hibernation, we’ll need to be particularly cautious identifying trading opportunities. Under the circumstances, many of our favorite vehicles, particularly gold and the E-Mini S&Ps, could start to behave in new and unaccustomed ways. This lesson focused on schizoid price action at ‘p’ midpoints – something that will take some getting used to if stocks, bonds and commodities are in fact in the throes of 180-degree turns.

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A 129.75 rally target given here previously remains valid (as does another, close by, at 130.15), but getting short there could prove tricky, since we'd be attempting it following the creation of a fresh, bullish impulse leg on the hourly chart. Obviously camouflage is called for, and it will be best found on charts of three-minute degree or less.   I've set a screen alert and will signal the opportunity in real time if things play out to our liking. 

Use the 27.330 downside target shown (erroneously given here yesterday as 27.530) as a minimum price objective for the near term. It would become an odds-on bet if the 28.210 midpoint pivot with which it is associated is exceeded on a closing basis. Alternatively, bulls would need to muster 30.130, topping a tiny 'external' peak from May 7, to reverse the tide.  More subtly, though perhaps less reliably, they could get back in the game with a close above 29.260 (per yesterday's analysis).

At current prices, the $20 thrust that I'd said yesterday was needed to energize the intraday charts has now grown to nearly $30. Night owls eager to catch a ride on the northbound will have one potentially easy opportunity to do so via camouflage. For this purpose, the 1623.80 'external' peak that I've labeled holds the key, and using it is likely to require a nimble response if a b-c retracement from just above it occurs as we might hope. ______ UPDATE (10:37 a.m. EDT): The tiresome dirge toward a modest, 1653.30 rally target identified here a while back appears to have aborted with this morning's plunge.  At the very least, the weakness has turned the tortuous rally into a duel between bulls and bears, since the weakness is impulsive on the hourly chart. A somewhat larger picture, using May 1's 1674.30 as point 'A', yields a downside target of 1497.90 on the 480-minute chart, so we'll use that as a minimum price objective for the  near term.

I've flagged a promising set-up in the E-Mini S&Ps that could play out this evening, so night owls looking to make productive use of their time should check it out.  A chart has been included that shows graphically why the opportunity is compelling.