On Thursday night in the comments, I said that SPY looked like it was in a bull-flag pattern. Here is what I was talking about (click chart to enlarge):
The Fibonacci price extension projected up to 116, but SPY hit resistance at its January 20th gap. Now look at the big red volume bar from this afternoon’s mini panic. That was a lot of selling, and may be a sign that this pattern is played out. What do you think?
In the first IWM FDI episode on January 11th, I wrote: “The small caps are likely to consolidate or pullback in the near future.” And that’s exactly what happened. See the green arrows on the chart (click to enlarge):
Not bad, huh? And now the IWM’s Fractal Dimension Index is back down in end-of-trend country (purple arrow). So “down” and “sideways” are more likely than “up” in the near future. We might have another scary plunge, or just a mild pullback like we had in August (blue arrows).
Note to Charlie mUNGer: Do you really want to go the “Al Gore Route”?
Warren Buffet sidekick, Charlie mUNGer, recently wrote a parable about the USA titled: Basically, it’s over…” I’m not disagreeing with his view, but look at this quote which refers to the USA:
“…rich in all nature’s bounty except coal, oil, and natural gas.”
OK, he was exaggerating a bit for his parable, but take a look at this weekly chart of natural gas over the past couple of years (click to enlarge):
The price of natural gas has continued to plunge right through The Winter of Al Gore’s Worst Nightmare. Does it look like there is an energy crisis on that chart? Not hardly. It turns out that natural gas is found in rocks, and the USA has lots and lots of rocks. In fact, we are sitting on so much natural gas that one badly placed spark could blow up the whole country.
That gas has been there all along; we just couldn’t find it. But now we have new technology, and we are finding it like crazy. If all that you have to dig with is a straw, the only place you will ever find oil is in Iraq. Everyplace else requires better drilling technology.
The moral of the story is that energy is a function of technology. If you say that the world will run out of oil on such-and-such a date, you are really proclaiming to know the future of technology. And seriously, who would be foolish enough to do that?
On February 4th, I wrote: “Of course, we have the big jobs report tomorrow morning, which often establishes swing highs and lows on the daily chart.” And we got a swing low, right? Now let’s look at an example of the jobs report causing a swing high.
On March 4, 2005, the BLS reported that the economy had created 262,000 new non-farm payroll jobs. Seems like a miracle, right? But look what the market did (click chart to enlarge):
The SPX rallied on the news, closed up another 3 points the next day, and then went off the cliff. That swing high lasted for four months.
I don’t know if the market printed another swing high today, but if it did so, it certainly wouldn’t be out of character.
As I expected yesterday, the SPX rallied up to 1123 and then turned down sharply with the SMH and IYT plunging through their Monday gaps. But while the market refused to fulfill the rest of my prophecy, if you were watching the comments, George gave you the heads up here. If you look at the time-stamp on his two comments there, and then look at a 1-minute intra-day SPY chart, you will see that he nailed the bottom and the squeeze into the close.
All the major ETF’s gapped-up Friday morning, but they all fell back to fill their gaps except for the XLF. The XLF single-handedly kept the market from rolling over. Everybody is expecting a weak jobs report this morning, and consequently the financials are cheering another month of expected easy money from the Fed.
If you are a bear, you can say: “That’s a dumb reason for a rally.” If you are a bull, you can say: “Rallying into a bad jobs report is an indication of animal spirits.” Traders appear eager to forgive a blizzard-weakened number, but will they really? Film at 8:30am. And don’t forget that swing highs, and lows, are often printed on NFP day. Maybe SPY will run up to George’s “Moo Gap” and set a bull trap.
