Weekend Update – www.thepracticalinvestor.com
February 7, 2014
— VIX probed impulsively to Cycle Top resistance before closing just beneath mid-Cycle support/resistance at 15.83. This constitutes a 65% retracement, implying the pullback may be complete, or nearly so. It has also broken through the Triangle trendline near 20.30 and paves the way for a higher move next week. Once it clears Cycle Top resistance and its Diagonal trendline, its most probable target may be its October 4, 2011 high at 46.88.
SPX pierced its megaphone pattern.
SPX pierced the lower trendline of its Orthodox Broadening Top (Megaphone formation) at 1748.00 and reversed to its Intermediate resistance at 1798.10. This completed phase 7 of that pattern. The Phase 8 may be a potential crash, since this is a major reversal pattern. The red trendline of its trading channel is also a reversal pattern, implying a decline to its origin at 1343.35.
(ZeroHedge) Despite the short-term memory-losing recency-biased perspective that a 2-day rally in stocks has seemingly set in investors’ minds, Citi’s FX Technicals group remains concerned that the S&P 500 is stretched by historical standards. At this point, they add, the S&P is more stretched than in 2007 and a bit less stretched than 2000 with the line in the sand around 1,700.
NDX retraces nearly two-thirds of its decline.
NDX retraced 66% of its decline, closing above all resistance. This was expected and is a normal retracement for a Wave 2. This type of rally is a bull trap, keeping investors reassured that all is well. However, once supports are broken, even if the index rallies above them, they are prone to retesting and may lose their ability to hold the index in the next decline.
(ZeroHedge) Following the 2nd dismal jobs print in a row, it would appear the market’s new “common knowledge” is that the Fed will be forced to un-taper – despite Hilsenrath’s “Fed stays the course” perspective. Everything is up today (apart from the USD). The disconnect from recent correlations were extreme as stocks lost the plot against FX carry, commodities, and bonds. The best 2 days in a row for stocks in 4 months sent most indices to critical technical levels and dragged all but Trannies and the Russell back into the green on the week.
The Euro has an “inside” week.
After making several successive lower highs and lows, the Euro closed above weekly Short-term support at 136.47. An inside week indicates indecision on the part of investors. The inability to make a new high indicated this may be a bearish pattern.
(Bloomberg) European Central Bank President Mario Draghi said the ECB could take action to counter low inflation as soon as next month, when more data on the euro area’s economy will be available.
“We are willing and we are ready to act,” Draghi said in Frankfurt today after the ECB left its benchmark interest rate on hold at a record-low 0.25 percent. “The reason for today’s decision not to act has really to do with the complexity of the situation that I described and the need to get more information.”
The Yen reversed at Intermediate-term resistance.
The Yen attempted to rally above its weekly Intermediate-term resistance at 98.21, but failed to close above its. This reversal was anticipated by the Cycles Model. The next break of the Head & Shoulders neckline may bring the Yen beneath its 2008 lows. That may not be so bad for some Japanese companies, noted below.
(BBCNews) Toyota is forecasting record annual operating profits as the weaker yen helps to boost sales abroad.
For the financial year ending in March, it expects operating profit to reach 2.4tn Japanese yen ($23.7bn; £14.5bn).
The continuing weakness in the yen also helped Toyota post better-than-expected earnings for the third quarter, with operating profit of 600bn yen.
That is nearly five times higher than earnings in the same quarter a year earlier.
U.S. Dollar also had an inside week.
The dollar eased down, closing above Intermediate-term support at 80.61. This is the sixth week that the dollar has hovered above that support. This week was an inside week, neither breaking higher than last week’s highs nor going lower than last week’s lows. It must break through Long-term resistance at 81.56 in order to appear convincingly bullish. Once accomplished, it has the potential to challenge the Cycle Top at 83.83.
(Reuters) – The dollar drifted lower after a weaker-than-expected U.S. jobs report on Friday that muddies the waters but is seen as unlikely to dissuade the Federal Reserve from diverting from its path of steadily removing monetary stimulus from the U.S. economy.
U.S. nonfarm payrolls growth in January came in at a disappointing 113,000 against a consensus of 185,000, initially sending the greenback sharply lower. However, a bright spot in the report showed the proportion of working age Americans who have a job or are looking for one increased
Treasuries are repelled at Long-term resistance.
Treasuries reversed on Tuesday before reaching weekly Long-term resistance and a potential Trading Channel trendline at 134.32. It is probable that resistance may be tested again this coming week. Unfortunately, the Cycles Model suggests a renewed decline into the month of March.
(Bloomberg) U.S. Treasury Secretary Jacob J. Lew said U.S. borrowing authority may not last past Feb. 27 and urged Congress to extend the debt ceiling as soon as possible.
Extraordinary measures used by the Treasury to keep under the debt ceiling “are likely to be exhausted in less than three weeks,” Lew said today in a letter to House Speaker John Boehner, a Republican from Ohio.
“Congress is scheduled to be out of session for part of that time, and it would be a mistake to wait until the last possible minute to act,” he said.
Gold also had an indecisive week.
Gold bounced from Short-term support at 1240.37 before challenging its Trading Channel trendline and weekly Intermediate-term support at 1262.35. This was also an “inside” week for gold. The Cycles Model calls for a month-long decline that may break through the lower trendline, or Lip of a Cup with Handle formation. The potential consequences appear to be severe. See the article below to determine who may have a problem when this comes to pass.
(ZeroHedge) Perhaps the only question we have after seeing the attached table, which shows that as of Q3, 2013 JPMorgan owned $65.4 billion, or just over 60% of the total notional ($108.2 billion) of all gold derivatives in the US, is whether the CFTC will pull the “our budget was too small” excuse to justify why it allowed Jamie Dimon to ignore any and all position limits and corner the gold market?
Crude is approaching its 50% retracement.
Crude rose above Long-Term resistance at 99.21, but the rally may not last. The Cycle Model suggests a strong reversal as early as Monday. There is a Head & Shoulders formation at the base of this rally, which, if pierced, may lead to a much deeper decline.
(ZeroHedge) Whether driven by real supply-demand issues, concerns over terrorism (sparked by the Sochi plane debacle), or hopes a renewed un-tapered QE on the basis of 2 piss-poor jobs reports in a row is unclear. What is clear is that WTI crude is having its best day in over 2 months – now at its highest in 2014, back above $100 a barrel and its most expensive in history for this time of year.
China stock ready for a meltdown?
The bounce from the January 20 low may not be complete. However, the bounce may extend no higher than Intermediate-term resistance at2116.92 by mid-week. Once accomplished, the secular decline resumes with the next significant low in mid-March. There is no support beneath its Cycle Bottom at 1954.15.
(Bloomberg) On any list of banking accidents waiting to happen, China is assured a place at the very top. But could a crash there take the entire global economy down with it?
Absolutely, says Charlene Chu, who until recently was Fitch’s headline-generating analyst in Beijing. Chu has fearlessly trod into an area that China is trying desperately to keep off limits: its vast shadow-banking system. Now that she’s working for a private firm that doesn’t have to rely to governments for revenue, as do rating companies, Chu is free to speak completely openly. And is she ever.
“The banking sector has extended $14 trillion to $15 trillion in the span of five years,” Chu, who is now with Autonomous Research, told the Telegraph. “There’s no way that we are not going to have massive problems in China.” What’s more, she added, China “could trigger global meltdown.”
The India Nifty “saved” by Long-term support.
The CNX Nifty bounced from its Long-term support at 5976.89. The potential loss of Long-term support at 5976.89 could be deadly for India stocks. The Cycles Model calls for a decline through mid-May. Could there be some economic disappointments ahead?
(Bloomberg) India forecast a faster acceleration in economic growth than analysts had estimated, a prediction facing risks from interest-rate increases to quell inflation and expenditure curbs by the government.
Gross domestic product will rise 4.9 percent in the 12 months through March 31, compared with the decade-low 4.5 percent in the previous fiscal year, the Statistics Ministry said in New Delhi yesterday. The median of 24 estimates in a Bloomberg News survey had been 4.7 percent. The projection may be revised upward later and the final growth rate is unlikely to be less than 5 percent, Finance Minister Palaniappan Chidambaram said in a statement e-mailed today.
The Banking Index breaks, then retraces to its trendline.
BKX unmistakably broke through its lower Trading Channel trendline and Intermediate-term support at 67.77. The uptrend line is broken and, more importantly, stands as a resistance to any further rally. The Cycles Model suggests a new low may be seen in less than three weeks. Might there be a flash crash?
(ZeroHedge) Raise your hand if you are surprised that, as has emerged, virtually every major bank was manipulating currencies (and everything else)whether as part of the “Bandits’ Club”, the “Cartel” or some other – until recently- secret message room.
That’s what we thought.
Now raise your hand if you thought the manipulation could be so pervasive, so glaring and so in your face, that even the oldest central bank – the Bank of England – and who knows how many other monetary authorities, were openly encouraging traders from these private banks to do more of the illegal activity they had been engaging in – namely manipulating currencies – with their explicit blessing knowing very well such behavior is undisputedly illegal.
(ZeroHedge) Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks. Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars.
First, let’s deal with the terminology. The “shadow” in shadow banking doesn’t imply nefarious doings, although it frequently involves a bit of regulatory arbitrage. At the most basic level, shadow banking is borrowing funds and extending credit outside of normal banking structures.
(ZeroHedge) Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn’t.
(TheTelegraph) Davide Serra, the founder of the hedge fund Algebris Investments and the man on the speed dial list of central bank governors and finance ministers, rues the day he was photographed striding into Downing Street with a sheaf of papers under his arm.
The documents detailed Serra’s views on the Royal Bank of Scotland and “the case for improving viability”– just ahead of a Government-backed decision to split off £38bn of badly performing RBS loans into a non-core division.
Have a great week!
Anthony M. Cherniawski
The Practical Investor, LLC
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