The dreaded honeypot period continues and the bewildering gyrations of the past few weeks have not offered market participants any further hints as to where things may be heading next. That of course is the sole purpose of a honeypot formation, so let’s take a peek under the market’s hood and lay out some crucial inflection points.
Since early November the S&P 500 has been running nowhere fast. If you take away all the daily noise (something P&F charts happen to be very good at) then you see it priced near where it started out six weeks ago. In case you are not familiar with P&F notation – the little B on the chart stands for November and the C for December. The low pole reversal warning off the lows triggered over two weeks ago and if I would show you a snap shot of this chart back then it would look almost identical.
On paper things are looking more positive as the SPX managed to claw its way back above the 25-week SMA. But if you look at the past half year then one cannot help but wonder if this bull market is running out of fuel. And that despite almost daily Fed sponsored POMO auctions supplying cash to primary dealers.
Some of you old timers may recall a pertinent 2010 article over at tradingtheodds which strongly suggested that nine or more permanent open market operations in one month [historically had remarkable and statistically significant positive implications with respect to the market’s short- (e.g. at least one higher close over the course of the then following 10 sessions) and intermediate term performance looking 1, 2 and 3 month ahead (trading higher 3 month later on all of those 144 potential occurrences/trades).]
So if QE cash is starting to lose its effectiveness then
Although there is plenty of fuel to boost equities through an almost ritualistic EOY Santa Rally we seem to be stuck right at the gate of an inverse H&S pattern that ought to push us right into new highs. But in order to get there equities will have to bridge a volume hole that has been acting as a brick wall for over two months now. Regarding the H&S I must point out that the left shoulder still looks a bit under developed, so even if we breach that neckline (i.e. volume hole) next week there’s a good chance we’ll see another retest and possibly a bear trap before things proceed higher.
Seasonal odds however strongly support an EOY rally scenario, in particular as we are now pushing into week 50, which is usually when the proverbial rubber meets the road. Of course the odds are only the odds and as such do not account for the occasional statistic outlier that may throw equities across the board in a tail spin. Thus a failure next week or the following may have catastrophic implications and may lead to an early start into what I expect to be a game changer in 2013. To be clear – medium term the odds favor the bulls, but starting early 2013 I am seeing trouble brewing on the equities horizon.
For cracks are clearly visible across the board. The least shining example of which is AAPL, the rising star of the S&P 500 representing over 4% of its entire valuation (and if I recall correctly over 12% of the NQ-100). But it may soon turn out to be a falling star as the past two months have been less than kind to its valuation. Our P&F shows us a rather frightening bearish price objective of 445. There briefly was hope as it registered a low pole flag reversal warning on December 7th. However it since has dropped back near its recent lows and closed at 533.25 last Friday.
The long term panels are not looking any very positive either. The November lows near 505 were followed by a run up to its weekly NLBL which where things fell apart rather quickly. The monthly shows us far below a NLSL, which if not remedied by the end of this year will trigger a monthly sell alert, which in turn may lead us much lower than the bearish price objective proposed by the point & figure chart.
So if you would like to know where equities are heading in 2013 – and I’m sure you do – then I suggest you look at AAPL as that now has become our proverbial canary in the coal mine.
Let’s wrap up equities with the VIX which is now apparently coiling up between two diagonal trend lines. Seasonal odds support us touching the 15 mark, although it’s not impossible we may once again push a bit below if we see an EOY short squeeze. This would by far be my favorite scenario as buying selling complacency (i.e. buying vega) during a blow off top is one of my favorite past times. A breach of 17 may mark the moment where the wheels finally come off the equities wagon, but even in this scenario the possibility a VIX buy signal (relative to equities) would be likely rather quickly as the upper BB is now descending into the 18 range. The message here is clear – even if you have bearish dispositions, don’t be in a rush. Let the tape lead the way.
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Bottom Line: We are awaiting resolution across various market verticals, which is typical for honeypot periods. Once things start unfolding on all fronts I expect acceleration so this week we should keep our long term charts on a short leash and monitor all inflection points presented above.
Cheers,
