Why is this pullback in the markets more significant than any other in the past nine months?  There is a negative divergence which set up the turn in the McClellan oscillator – higher prices, but lower market breadth.  This is exactly the reverse of the positive divergence which preceded the market bottom in March 2009.

It’s been quite a time since my last post.  The real reason is that I was out of the rhythm and beat of the markets since covering a multi-year short bet in March.  I didn’t have the force of character at the time to flip long, at an incredible opportunity cost to my trading account.  The lack of clean pullback from the March 2009 lows has provided very few good entry points.

I have also come to realize the futility in relying on other trader’s calls – most notably Doug Kass’.  I am relying much more on my own insights going forward, with links noted wherever possible to relevant market insights.

The markets are experiencing the second day of pullbacks from multi-month highs.  In particular, the structure of the S&P 500 suggest the possibility of a completed 5-wave series given the near-perfect Fibonacci ratios between successive waves.

Doug Kass made news last week with his “market has topped“ declaration. Kass said that the market has more than likely peaked for 2009.  He believes the consumer is dry and can’t afford to spend money on anything but necessities. The retail consumer is the primary driver of the economy and responsible for some 72% of the GDP. With summer over and the home buying season over that will mean the consumer is going into hibernation for the winter. He also worries that taxes are going sharply higher despite campaign promises simply because of the rapidly rising Federal deficit.

Doug was one of the few analysts bold enough to call for a market bottom in early March during an appearance on CNBC.  Once again, keep an eye on the dollar as it has how traded into pocket support.  There are rising wedges visible on almost all indicies which suggest a profit-taking wave is inevitable.

As expected, the Shanghai Composite index encountered pocket resistance on the weekly chart.  Despite major news outlets decrying the 20% drop as the beginning of a bear market for China, it is actually a healthy pullback after a total gain of 109% from the November lows.  This pullback can be considered the handle of larger cup & handle formation – this setup was also encountered in the March 2009 lows.

Examining the daily chart, it appears that 2,750 will be a very crucial technical level to establish itself as a short-term floor.  This is where pocket support should come into play on the weekly time frame, and it a test of the rising trend line from the 2009 January – March spike lows.  It is also a 50% Fibonacci retrace of the advance from the March low.

Much thanks goes to Steve Garner – Gatetrader – for his ongoing insights found in the commentary section about the S&P, crude oil, volatility, and interest rates.  He taught me almost everything I know about bonds and interest rates.  Along with Ox, another great trader, he opened my eyes to inter market dynamics and paved the way to foreign exchange trading.

The dollar has been slapped around for quite a while now.  There are signals which suggests a trend change is in the making which will have a profound effect on commodity prices and markets.

In early March a wolfewave pattern gave rise to a topping pattern in the dollar index.  Now there is a clear positive divergence (lower prices, higher momentum) which was confirmed in Friday’s trading session.  The larger structure suggests that an Elliott 5-wave pattern has completed, and in the weekly timeframe there is pocket support and the presence of a large A-B-C structure.

Crude Awakening

Crude oil drives both political and psychological markets.  It is now against pocket resistance on the daily charts at 72.  This swing trade will be very profitable on a move back to the lower 60′s to form some type of channel or symmetrical triangle pattern.  Pocket support will be around 62-63.

Thanks to scooter for posting this updated AdvancedGET daily chart of the S&P 500 futures.  There is a rather large make-or-break (MOB) zone at the 980 – 1,000 century mark.  This target level was originally called in the Advanced GET blog postings starting on July 16.  At that time, the Elliott wave count was putting in an intermediate term wave 4 low.

Once again, we are looking for signals of an ending 5-wave count and trend change.  This should be accompanied by a clear divergences of prices vs. momentum – higher prices, lower momentum compared with the previous wave 3 highs.

Back on November 5, 2008, this chart outlined the ascent and breathtaking fall of the Shanghai Composite Index.  This pattern played out a mere five years earlier in the Nasdaq Index.  The key to the bottoming process was the breakout of the steep down trend line – the Chinese markets registered this signal a few day later and on November 22, 2008 I noted that it should lead the global markets.

Nine months later from the original post, the SSEC Composite is up an astounding 83% from the lows around 1,700 to today’s close at 3,145.  Over the next weeks, expect there to be consolidation sequence due to both gap resistance around 3,200 and pocket resistance up to 3,500 as seen on weekly charts.

The markets tested the neckline of a two-month head & shoulders setup.  There was no decisive break and the markets should now test the 20 day exponential moving average (purple line).  Note how this has provided support well into the June timeframe, with the latest round of consolidation between the neckline at 870 and shoulder of 920.  Yesterday produced a ‘wr7′ signal – widest range in 7 trading sessions.  Expect today to produce a very narrow range, perhaps an ‘nr7′ – narrowest range signal.

12:00 pm update – An intraday test of the 900 century mark and 20 ema levels.

The market is now at a critical juncture.  Internals suggest that the intermediate term defensive / capital preservation team is now on the field.  A head and shoulders pattern (rounded top) is now visible on most major indicies.  Today’s price action will most likely confirm this setup on an impulse move.

From Matt Taibbi’s “The Great American Bubble Machine” in Rolling Stone Issue 1082-83.

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.