– The VIX has broken out above its Ending Diagonal inside a doubly indicated bullish Descending Wedge pattern on December 27. It has rallied to mid-cycle resistance, then pullback to find support on the lower trendline of its Descending Wedge. The VIX will change to a buy signal once it breaks out above its most recent high and climbs above mid-cycle support/resistance at 24.11. At that point, the bullish phase is reestablished on the weekly trend as well as the daily.
SPX is in a pre-crash pattern…
– The /SPX breakout above the support/resistance line that has dominated the market since the March 16 low. As a result, it has started 2012 looking bullish. However, it has made no progress since it’s breakout on Tuesday, January 3. That date happens to be the “bull’s-eye” for the cycle turn window. In fact, it may not have made a noticeable reversal since the NDX turn window is Friday, January 6. Also keep in mind that bearish sentiment(http://www.zerohedge.com/news/bearish-investor-sentiment-nears-record-lows) is at record lows.
The NDX broke through resistance to challenge the Broadening Wedge.
– The NDX vaulted above its 50 day moving average at 2296.88 last Tuesday, and it has stayed aloft since. On Friday it closed at the trendline of its most recent Broadening Wedge. This may be the high for 2012 since Friday was a cyclical turn date.
By this time next week the breakdown should be apparent.
The Euro may be due for a bounce.
– All attempts by the Euro to reach back to its neckline have failed so far. After having crossed the Head and Shoulders neckline in cycle bottom support/resistance at 132.50, it has corrected only modestly, and not back to the neckline. This shows acute weakness in the Euro.
Zero Hedge reports(http://www.zerohedge.com/news/euro-shorts-surge-new-record-high-ec-margin-hike-approaching) an unusually high commitment of retail traders to Euro short positions without the commensurate dollar longs. This leads the author to speculate whether there might be a margin hike to unwind some of the speculative shorts. Meanwhile, the investment banks(http://www.zerohedge.com/news/goldmans-stolper-speaks-sees-eur-downside-120-time-go-all) are recommending their clients to short the Euro.
The cycles suggest that the Euro may be due for a reversal early next week. The potential retracement targets may be intermediate-term trend resistance at 131.87 or possibly even the underside of the head and shoulders neckline.
The US Dollar has broken above its prior highs.
– The US dollar retested its Head and Shoulders neckline at the start of the New Year and has since made new highs. The dollar is now poised for the most aggressive portion of its rally, where it could meet either of the targets listed above by the end of January.
While the commitment of traders remains strong in Euro shorts, there is room to grow in the commitment of traders to be long the dollar. The US dollar breakout above its Head and Shoulders neckline followed the breakdown of the Euro below its Head and Shoulders neckline by almost 2 weeks, giving the dollar rally room to grow.
Gold breaks, then retests its new neckline.
– Gold bounced back above its massive Head and Shoulders neckline now at 1574.00 this week. By Friday it appears to have reached the top of its correction, just short of intermediate-term trend resistance at 1657.15. An alternate view suggests that the massive neckline may indeed lie at 1523.90. Therefore a drop below that level may confirm that the crash has begun.
There is some chatter on the blogs(http://www.zerohedge.com/news/gold-outpacing-oil-ytd-stocks-disconnect-again)about gold outpacing stocks this week. The message seems to be that, in regards to this decline, “this too shall pass“(http://www.zerohedge.com/news/guest-post-why-has-gold-been-down) While I am aware of this persistent bullish sentiment, the technical indicators suggest a strong decline straight ahead.
U.S. Bonds are testing trendline support.
– This week USB tested intermediate-term trend support at 142.82 and its broadening wedge trendline at 143.00. While this weakness may appear worrisome, USB has not technically broken down yet. Slow Stochastics have become oversold enough to produce a rally lasting another month or longer, which is in agreement with the cycles pattern.
I remain bullish, since the cycles support the uptrend through mid-February, if not later. In fact, the Broadening Wedge formation strongly suggests an acceleration in the price of USB. Zero hedge writes(http://www.zerohedge.com/news/record-consecutive-treasury-dump-feds-custody-account) about the decline of foreign holdings in the US Treasuries from the Feds custodial account. Although this news may be alarming, it has not changed the trend in USB.
Crude is caught between support and resistance.
– West Texas Crude broke through its downtrend line (red) but was stopped at the minor Broadening Wedge trendline. It appears that the cyclical turn window has been stretched to the end of the week.
West Texas crude prices seem to be affected by what is going on in Iran. Art Cashin seem to think that the bigger story(http://www.zerohedge.com/news/art-cashin-explains-what-really-happening-iran) is what seems to be happening in Iran’s currency market, which is plummeting. This will do more to bring the price of oil down than saber rattling(http://www.ft.com/home/us).
China stocks making new lows.
The Shanghai Index continues its decline below cycle bottom resistance at 2206.74. The bounce in the first week of the New Year in the Shanghai Index didn’t amount to much.. This suggests that the decline may continue unabated through mid-February for the Shanghai Index. An alternate view suggests that the index may still attempt to rise back to the neckline for a retest. The surge above 2206.74 may confirm that intention. In the meantime we remain bearish.
The India Nifty index has retested its neckline.
The India Nifty index has done a double retest of its Head and Shoulders neckline in a regular trading cycle high that was due this week. It is now about to resume its decline to the head and shoulders minimum target of 3101.50. This two-year-old Head & Shoulders pattern appears very ominous for the Nifty.
The banking index has finished its retracement.
The BKX rally this week to its late October high, but did not exceed it. There is no bullish breakout in the BKX and for once I applaud CNBC (http://www.zerohedge.com/contributed/first-i-set-cnbc-fire-now-it-appears-ive-set-sell-side-wall-street-fire-well) for its coverage on the banks. The rally has run its course and is due for a reversal this weekend.
The magnitude of this decline will be enormous. The cycles suggest a potential acceleration in the decline within the next two weeks. Perhaps it may decline below its massive head and shoulders neckline at 32.56. A decline of any magnitude in the world’s largest banks(http://www.zerohedge.com/news/top-three-central-banks-account-25-developed-world-gdp) may have far-reaching effects on our way of life. I hope you are prepared.
Anthony M. Cherniawski
The Practical Investor, LLC
P.O. Box 129, Holt, MI 48842
Office: (517) 699.1554
Fax: (517) 699.1558
Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security. The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model. At no time shall a reader be justified in inferring that personal investment advice is intended. Investing carries certain risks of losses and leveraged products and futures may be especially volatile. Information provided by TPI is expressed in good faith, but is not guaranteed. A perfect market service does not exist. Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment. Please consult your financial advisor to explain all risks before making any investment decision. It is not possible to invest in any index.
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