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This week we have a two-day Fed meeting, where they hope their irrational
bullsh*t story will scare the neurotics into buying puts and shorting again,
so these idiots can be squeezed out going into options expiry. In this
regard, its no mistake this Fed meeting is in an options expiry week (or at
month's end), not that they couldn't accomplish the same thing with other jawboning
type theatre. Amazingly, traders / money managers / whoever, are so out
of it these days the Fed is able to influence the markets with just expectations
management, without having to take any actions, given this condition is
now getting mature, meaning people are noticing this more and more and
trading around it. This is the condition circumstance required for meaningful
reversals in bubble markets.
So for this reason, things may not turn out according to Fed script this
week because broad market(s) speculators, who are far more rational than
those in precocious metals by the way (they respect risk), appear to be
exhausted, as measured by falling key open interest ratios with prices, most
evident in the absolute collapse in the RUT
last week being the most extreme example. What this means is these guys
cannot take anymore pain, and no matter if stocks appear to be crashing, they
will no longer bet on such an outcome by either buying puts, or outright
shorting the market(s). And again, since we appear to have this sentiment
shift in hand, and with the Fed meeting this week likely to embolden the
bulls (who are never disappointed by a Fed dedicated to preserving its asset
bubbles), we could have a surprise for the status quo with the S&P 500 (SPX) falling to
2000, possibly setting the head in a larger degree head and shoulders pattern
(H&S) that would count down to the 1880 area.
Updated short interest charts, shown
here, support the view weakness in stocks could persist directly ahead.
That being said, we have a Fed meeting this week, and they will do and say
anything to keep their bubbles inflated so anything is possible in the short
term. This means they will not remove the word 'patient' from their official
statement without replacing it with some other linguistic gymnastics traders
can obsess over. As you will see below, German stocks should continue to
enjoy a QE tailwind in the short-term, so this week could be up for US stocks
as well, given new highs would most likely not be in the cards. Best-case
upside potential on the SPX is at approximately 2090, which defines the upper
extremity of the right shoulder of the existing head and shoulders pattern.
Past this is where it could get interesting if the three monthly ratio
charts from the Chart Room below have any predictive value, where in the
first case we can see that because of the collapse in the euro, and the colliery
economic competitive benefits this will give European exporters (with Germany
at the forefront), the DAX has risen over 20% in just the last quarter, and
is likely not done yet if the Fibonacci resonance projection (seen in Figure
1) has any predictive value. This should of course be of no surprise with QE
in Europe now, however what might be surprising is how fast the benefits are
burned off if collateral
keeps drying up, which won't hit the money supply growth rate figures
until it's too late for both bond and equity bubbles alike. (See Figure 1)
Figure 1
 
What's worse in this respect, it should be pointed out that while the
parabolic moves in both the euro and DAX likely have further to go, once the
later hits about 12,300 (only 300 points away now), not only will it be at
the significant Fibonacci resonance related resistance denoted in Figure 1,
from an important ratio related perspective dating back some 15-years, it
will also be at an extreme against the Dow (see below), meaning all the
bubble blowing benefits of ECB QE may be priced in at that point. A move to
17,200 on the Dow coupled with a 12,300 print would take the Dow / DAX Ratio
below the 1.4 mark in a blow-off to the downside matching extremes not
witnessed since the tech bubble in 2000. (See Figure 2)
Figure 2
Of course all this bearishness in stocks must be tempered until the SPX /
CBOE Volatility Index (VIX) also gives us a clear signal the party is over,
where as explained previously it would be better to see a blow-off up to the
200 area to signal a lasting top is in place. Any other scenario would leave
the possibility of bearish speculators returning to the derivatives markets
again prematurely, igniting unexpected short squeezes no
matter how bad earnings get. That being said, while the trading pattern
in the SPX / VIX Ratio looks like a developing bull flag, and maybe it is
with more time required, the indicators and stochastics paint a different
picture, one where we should expect lower prices. We didn't get clear signals
(patterning) in 2000 and 2007 either, so maybe we won't this time as well.
(See Figure 3)
Figure 3
And one thing is for sure, if the SPX / VIX Ratio doesn't hit extreme
sinusoidal resistance now in the 200 area before closing two months below 80
(significant moving average support), this would be considered a failure,
signaling a move to the bottom of the pattern. This is not what an asset
dependent America needs given recession is spreading rapidly around the
globe, where like in 2000, this may initially have a negative effect on precious
metals before central authorities really panic and money supply growth rates
accelerate higher. This is all in motion now, and is likely why the bond
market(s) are likely to top out this year once they see that coming.
As for precious metals at the moment however, all that's happening here is
they are churning as the broads fall, but once stocks can manage a lasting
bounce, likely off the large round number at 2000 on the SPX, this will
probably result in a continuation of their decent(s), no matter what the
dollar($) is doing. That being said, with the broads possibly declining this
week, don't be surprised if an unnatural bid comes into precious metals,
however again, any such strength will most likely prove to be more violent
churning in the end, where we are already seeing this in the violent swings
being exhibited in the juniors. Here, it's not uncommon to see 10 to 20%
daily swings these days, where whipsaws like this are enough to
bankrupt unsuspecting traders in no time. And that's exactly what will
happen to reckless speculators in the sentiment driven markets we have these
days (because of the machines, algos, etc.) that don't know how their
brethren are betting, where it should be pointed out the consensus here is
still bullish - I mean - 'how else you gonna bet' (try and imagine that being
said with a heavy Brooklyn accent)?
Looks like we're getting close folks.
Time to pay attention.
Captain Hook
The above was commentary that
originally appeared at Treasure
Chests for the benefit of subscribers on Monday, March 16, 2015.
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