Being tight with Clubber Lang has its benefits in times like these. Yesterday I suggested "selling might be about to intensify." Today, "I predict pain."Why, you ask? Is it because oil prices continue their relentless rise?
You must be kidding! Hyper-inflation might be the KEY to the stock market's pending melt-up.
Is it that pesky Paul Volker, former chairman of the Federal Reserve, commenting on the questionable legality of the Bernanke Fed's "bailout" of the financial system via its "rescue" of investment bank Bear Stearns? Could Mr. Monetary Tough-Love now be advocating a controlled disintegration of the financial economy, much as he hoisted upon the manufacturing economy some years ago with a 20% discount rate?
(For the record I hardly think this reclusive man's commentary would gain mainstream coverage were it not part of the same end game as brought Bear Stearns down.)
Yes, Mr. Volker's public resurgence of late is curious. But is he possibly being farmed to cultivate uncertainty about what the Fed might do next? Might the Fed actually raise rates in an attempt to defend the U.S. dollar? Or is this all part and parcel of more empty "strong dollar policy" bluster that passes for responsible management of our nation's currency? Why, even the king of bluster, Larry Kudlow, is talking about the "Paulson Peso" now! As if the dollar had begun its slide the day "Henry Potter" Paulson came to Washington, having graduated from Goldman Sachs to become U.S. Treasury Secretary.
Now, I believe the trend is your friend ... and the dollar's has been down since Y2K+2. This trend might very well accelerate sometime in the near future, as well ... what with the deluge of dollar denominated liabilities the concert of Wall Street and Washington have flooded the globe with over recent years. But a dollar collapse before the presidential election? Not very likely. So, currency concerns would be a premature reason to predict pending pain in the stock market.
Of course, Volker's legal concerns surrounding the Fed's foray into investment banking are entirely legitimate. So, might we need another shakedown threatening the financial system to cement the U.S. government's commitment to go down with the mother ship Great Britain built through its unregulated offshore financial centers that deal derivatives like confetti at a ticker-tape parade?
I haven't got the answer. Nor am I pounding the table to claim any pain imminently possible in the stock market might have something to do with those elements of the real world drama I have briefly noted here. Rather, I turn to the charts and distill a view in the eyes of an Elliot Wave Guy (whose specific conclusions are entirely unspoken because your ultimate sanity matters) with simpler observations to substantiate what appears to be the stock market's path of least resistance.
Now, you might think today's RSI divergences registered while the S&P 100 ratcheted lower is a positive indication the stock market's several days of languishing is nearly (if not already) over. Well, I just don't see it that way.
In fact, you might be hard-pressed to convince me today's performance is much different than either yesterday's or late day Monday. In both these instances I was dubious of pending possibilities (and proven correct in this view). I remain much the same. In fact, given that today's worst RSI reading did not exceed yesterday's (registered when the S&P 100 gapped lower at the open) suggests much more selling might be in store.
Now, I could be wrong about this. The S&P 100 might move slightly lower (say, to 615-620) and be accompanied by an RSI reading registering above today's worst level. At that point several rally possibilities would come into play. However, rather than elaborate on these, I prefer just letting things play out for another day or two.
Although I do not typically pay much attention to trend lines (drawn above in blue), I thought it possibly useful to making the case calling for additional selling pressure over the days ahead. As I hinted above, this might only result in the S&P 100 returning to the lower end of the narrow channel drawn on the above chart (i.e. 615-620).
I fear, however, a re-test of March 17th's low (and a decline still lower, as I laid out last Friday) might be more likely to occur. This conclusion I largely make out of consideration of this week's RSI performance, as discussed above.
Although the broader market's rising trend has not yet been broken, the volume of shares traded remains notably subdued. As I have recently stated, diminishing volume accompanying a rising trend is not indicative of the "Wall of Worry" the stock market is said to climb.
I might also suggest that, if there were presently a great deal of underlying buying interest, then it seems this week's slight decline would have been accompanied by a volume of shares traded greater than was registered during the last few days of March.
However, just the opposite has occurred, suggesting there's both diminishing demand and underlying complacency the rising trend of late will not be substantially upset. Although this is nothing more than my presumption of what the state of things are right now ... if reasonably correct, then look out below.
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.
Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.
Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.
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