First It Was A High, Now the Low Is In

02/14/2018 4:48 pm EST

Focus: STRATEGIES

Jeff Greenblatt

Director, Lucas Wave International, LLC

If the bond market gets follow-through from today, I would expect the market to get a shake of the trees. That would be the true acid test of whether we can recover, says Jeff Greenblatt, editor of The Fibonacci Forecaster Wednesday.

When I woke up Wednesday morning, the Dow Futures was down 260 points. The pundits on the business channels blamed a higher than expected inflation report. So how did we get to the point where the Dow was up over 200 points with one hour left to go?

Last week markets had a lot to be concerned about. The bond market was dropping and the crowd suddenly saw longer term rates start to rise.

You are not surprised, I’ve been calling for the development of a new young bear market for bond prices. Markets were off their highs but started dropping for real when the FISA memo came out.

To a lesser extent, traders bought the rumor and started selling after Trump came home from Davos where his speech touted the return of the American economy. Finally, last Thursday one business channel had a screaming headline that said, “there is no end in sight.”

The market turned the next morning. There were any number of calculations when it happened.

Here is what happened on the NASDAQ 100 (NDX) on the hourly. One of our square out tendencies measures the last leg of a move. For Elliotticians that is the C wave. In this case, with a range of 858 points, the last leg is 552 points. That is 64% of the move. By itself it means nothing. But when you combine it with the low price of 6164, now we are getting somewhere.

chart

The S&P 500 (SPX) had a reading as did the Transports (DJT) and others. But they needed some follow through.

Today was a good test because if this was last week, there is a good chance the market would have followed through to the downside, but it did not. In terms of sentiment, the crowd feared higher rates, right? In her last Fed meeting even Janet Yellen mentioned inflation concerns.

Today it was right there in print. But instead of fear, the crowd digested it and concluded a little bit of inflation might be good for the soul since it means the economy is getting better. So, they bought it. It’s a small shift in psychology, a giant leap for market-kind.

Does that mean we are back in the bull?

It’s too soon to tell. You can’t rule it out but its prudent to take it one step at a time. What today’s sequence means is we are starting to get the upper testing of the breakdown. The Dow corrected about 12%.

Let’s face it, this is not a 1987 style crash but it’s more than we’ve had in recent memory. Remember we talked about the high coming in at the 610-day window to the August low for the Dow? We may very well go through this whole thing all over again in the middle of the year when the charts hit the bigger 610-day window to the February 2016 bottom which affected most of the market.

But here’s something important to note.

The bond market got hit today and did not recover. Does that mean the stock market could wake up to that fact tomorrow? It is possible. That’s why we take a move like this one day at a time. Earlier in the week, the bond market stopped going down which meant people didn’t have to worry about interest rates for a few days.

In terms of the other problem the crowd is concerned about, the wheels of justice grind very slowly and the FISA business concerning government corruption will drag on for months. We may very well be sitting in the calm after and before the next storm.

If the bond market gets follow-through from today, I would expect the market to get a shake of the trees. That would be the true acid test of whether we can recover. The way things look right now I’m looking at upper testing to the January peaks.

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