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Don't Short the Farm

05/25/2017 2:55 am EST


Jeff Greenblatt

Director, Lucas Wave International, LLC

Trump’s historic agreement with the Saudis has materialized while the market is near a big top. That doesn’t mean you go out and short the farm, asserts Jeff Greenblatt. He’s the director of Lucas Wave International and editor of The Fibonacci Forecaster.

Last week we discussed the constant drip, drip, drip of bad news every single day. Another scandal broke the market got upset. But they developed a fast case of amnesia because here we are a week later and most charts have recovered. While I don’t think the political intrigue is done, the Saudis certainly helped change the agenda.

It could be part of the psychology for markets recovering but by last Thursday a set of new calculations did mitigate the damage by the drop from May 17. Take the Dow for instance. It peaked at 21169, up 170 trading days from the Brexit low. This was an interesting vibration that has held for over two months. I thought we might get more when it rolled over last week when it gapped down off a 21033.53 price point at 53 days off the high. But it only took two days to find a low at 20553 in 55 days. It has the potential to create a tight trading range due to these calculations. But charts like Amazon (AMZN) and Alphabet (GOOGL) are at new highs again while the PHLX Semiconductor Sector (SOX) is right there.

chart 1

That’s one side of the market. The other side is (M) for Macy’s which you know got hit hard a couple of weeks ago and has not recovered. Goldman Sachs (GS) has a 255.15 high and turned back up at roughly 54 trading days. Since Goldman is the most heavily weighted Dow stock, it would very hard for the Dow to sustain without their participation. For now, Goldman has filled the gap from a week ago.

Transports is also lagging but retesting the latest breakdown.

But I think the most interesting chart of the week is coming from distant China. Here is the SSE Composite Index Exchange Trade Fund (SSE) and yesterday Moody’s downgraded China a notch from A1 to AA3. A couple of weeks back the SSE turned back up on an interesting vibration. It was roughly 116 calendar days from the prior low in January which just so happened to come in on January 16 which 1/16. This low vibrated at 3016. Usually, when this sort of thing happens the pattern should have enough gas in the tank to make it to first resistance which is the last thrust to the low line. In this case that is 3154. But the action stalled last week with the Trump news at 3119 and has not recovered. The SSE is showing weakness and is another potential problem going forward.

chart 2

Last week I mentioned the larger degree cycle picture. We are coming to the 30 year/360-month anniversary to the 1987 crash leg. Around the same time markets will be at a golden spiral 618-620 months. If the market chose a different outcome than the one we’ve had this past week, I might’ve had to rule out the bigger picture cycles as a high and start looking at them like the low we had in 2011. It does not look like that scenario is playing out. Tops are very complicated and can take months to play out.

Here’s something to consider. I’m a great fan of Prechter’s Socionomics. The Socionomics view has mass crowd psychology as expressed by the market oscillating from extreme optimism to pessimism and back.

According to Socionomic theory, peace treaties and agreements usually materialize at peaks in optimism. Terrible wars start and create destruction out of the anger created by bear markets. The maximum destruction from WWII came because of the generational retest 1942 bottom.

I couldn’t help but think Trump’s historic agreement with the Saudis has materialized while the market is near a big top. That doesn’t mean you go out and short the farm. However, you should consider these kinds of feel good agreements don’t happen when the market is bottoming.

We may very well see this long-term cyclical picture play out and if that is the case so should the divergence.

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