Week of January 23 – 27 v. 5/4

Stocks stayed on their January winning streak as positive earnings and renewed hopes for a favourable EU resolution kept the bulls in charge. Rising in all four sessions, the Dow climbed more than 2% closing at 12,720 while the S&P 500 finished at 1315. While I thought we might have seen more downside early in the week, the overall outcome was not all that shocking. The proximity of the bullish Jupiter-Uranus aspect allowed for the possibility of a break out above 1300 which I noted in last week’s newsletter. Clearly, I have underestimated the power of this Jupiter-Uranus in January even though it has been the closest aspect. I expected less of a direct path higher and more choppiness as bearish Saturn battled it out with Jupiter and its bullish ally Uranus. Not so. The market continues to push higher on diminishing volume, a possible sign of approaching weakness but without any obvious technical sell signal. Saturn’s caution and unease are lurking in the background here not too far from the field of action as we watch for the outcome of the Greek default talks. No news is good news it seems as stocks have marched higher without interruption.

As I have mentioned previously, this rally is getting close to a top, especially as Jupiter is now moving out of its exact aspect with Uranus. In retrospect, this pairing has been a key reason for the January rally. Now that these two planets are separating, there is more reason to be skeptical about any further highs. Highs are still possible, of course, but their likelihood would seem to decline now over time. The IMF fulfilled another Jupiterian promise last week as it pledged another $600 Billion to the Eurozone in order to back stop any trouble. In addition, key EU bond auctions went well as yields fell across the board. Just who was buying the bonds isn’t yet clear, although one suspects the ECB’s Draghi was filling up his shopping cart. While a Greek default may well have been discounted by the market, its implications are another matter. A disorderly Greek default would threaten some private European banks as losses on loans may exceed the 70% figure that is currently being quoted in debt talks . It is possible that this could trigger a domino effect where insolvent banks such as Paribas or Soc Gen have to cover losses by selling liquid assets such as gold and US Treasuries. This could set up a chain reaction that quickly undermines equity markets around the globe. Admittedly, this is the bear fantasy scenario and we aren’t there yet. I tend to think we won’t see such a downward spiral until April at the earliest, although I still expect some kind of correction in the near term. This is more likely to be countered by yet another central bank intervention or other stalling tactic by the Greek government. As Jupiter gently moves into the background here, Saturn is preparing to take a larger role as it approaches its retrograde station on 7 February.

Well, if the market looked overbought last week, I guess it looks even more overbought this week. As we know, a strongly trending market can defy the usual technical indicators for a long time, just as the market did in 2009 and 2010. Without the artificial boost of QE3, however, stocks look less likely to defy gravity for that long. Some observers have noted that the Fed’s lending of cheap Dollars to the ECB basically amounted to QE3 by stealth so perhaps one should take that notion more seriously. And Fed Chair Bernanke is due to speak on Wednesday at the FOMC meeting so there is a possibility that he could announce something along the lines of QE3. But with US economic data strengthening lately, it seems fairly unlikely that he would announce anything major. With the indexes pushing up against resistance here, the market seems primed for some kind of correction. So far, the SPX has broken above the first trend line resistance and 200 DMA at 1270 and is now venturing for the next one at 1310-1330. This is arguably the more important falling trend line off the May 2011 high. And the market is getting overbought. Stochastics have moved up to 99 no less while RSI are one or two days from getting to the 70 line. Obviously, it could continue past 70, but there needs to be that much more in terms of enticement to get bulls to commit money on the long side. And the SPX is now right up against the upper Bollinger band at 1320. MACD is maintaining its bullish crossover here but is forming a negative divergence with respect to the previous high. While the Dow has broken above its falling trend line, the broader indexes are still under performing the blue chips. On the NYSE Composite, Friday’s close only just matched October’s high.

The High-Low index ($RHNYA) failed to keep pace with the indexes and is thus showing a negative divergence. It peaked in the first week of January and has been trending lower since then. This is an important indicator that some kind of correction is imminent. It could come next week or perhaps the week after but certainly soon. Meanwhile, copper has reached an important resistance level of the 200 DMA and its previous horizontal support level dating back to August. It posted a decline Friday so this another important indicator that an interim top of some kind may be bear. On the other hand, treasury yields did rise back above 2% on the 10-year last week, suggesting that the rise in equities was fueled by liquidity seeking higher return. This is neither bullish nor bearish for stocks although it somewhat legitimizes the bull case for stocks in the near term. Without any substantial amount of fear in the markets here, yields may simply be too low here to attract enough buyers. That money has moved into stocks. So we could see stocks reverse near current levels. A final run-up to 1330 is therefore still possible, although it may not last long. An initial corrective move may be quite small, perhaps only back to 1290-1300 before bulls move in to buy the dip once again. It is only when they fail to make a new high that things will get interesting. 1280 could be an important level of support on either the first or second move lower, which coincides with the 20 DMA and the previous low. I would also expect the 200 DMA to offer some support at 1257. The 50 DMA at 1248 is near enough that we could see some buyers there. Such a shallow correction (-6%) would be the more bullish scenario and I suspect we will get something deeper, perhaps back to 1180-1200. 1200 will be very important for the bulls to defend.

This week offers another shot at a reversal due to the Mars retrograde cycle that begins late on Monday. When Mars turns retrograde, it is said to intensify negative energy. This is by no means a sure thing, however, as other planetary influences have to be taken into account. Jupiter-Uranus is still close at hand so I would be surprised if the market turned on a dime here and just did a swan dive. That said, Monday’s Mercury-Mars aspect has the potential to move markets significantly, with the negative outcome more likely. I would also note that a positive outcome is also possible here because the aspect is 120 degrees rather than, say, 90 degrees. Tuesday has a better chance for a rise due to Mercury’s entry into Capricorn. This is not a huge factor but it is something which could temper any possible down move. It’s another reason why I am keeping my bearish expectations fairly low this week. Then the Moon conjoins Venus on Wednesday and Thursday, another potentially bullish energy. This is another weaker influence but it could offset some of the negative Mars energy that is out there. Bernanke speaks on Wednesday afternoon so that may suggest the usual bullish bias at least heading into the statement at 2:15. Late Thursday and Friday seem more negative as Mercury is in aspect with Saturn. Two possible scenarios here might be an early week sell-off back to 1290 followed by that lower high to 1310 on Thursday perhaps. This would set up Friday’s second sell off and would clear the path for a larger move down into early February. That would be quite welcome but it may also be overly compressed. A more conservative scenario would see this topping pattern formed throughout the week with a possible high put in as late as Thursday somewhere above 1315. I can’t quite bring myself to believe that stocks could stay that high for that long, but then again I’ve underestimated this rally so far. On the other hand, we should take the Mars retrograde seriously as a potential turning point.

Next week (Jan 30-Feb 3) is another candidate for a down week. The Mars retrograde will establish itself on more solid ground, Jupiter will have moved a bit further off Uranus and Saturn will be one step closer to its station. The Venus-Mars opposition aspect is likely to figure prominently here and should be a bearish influence. The aspect is exact on Wednesday February 1 so that is perhaps a more likely time when it would manifest. This is perhaps a more likely down week. The following week (Feb 6-10) Saturn turns retrograde on Tuesday the 7th. This is also a strongly bearish factor that is likely extend the down move into a full-fledged correction. The early week looks somewhat more bearish and could generate some significant downside. It is possible the corrective move could last into the next week although I am unsure about that. If the bears are lucky, we could see 1200 tested on the downside. The bears haven’t been lucky lately, however, so we will have to see. Gains look more likely in the second half of February, although the market may be choppy. There are some clearly bearish short term aspects in the mix at that time that could keep markets fairly weak. (e.g. Feb 22-23 Mercury opposite Mars = very bearish!). And yet because Jupiter will be approaching its bullish aspect with Pluto in mid-March, there is a good chance that stocks will recover. But I acknowledge the possibility that stocks could sag through much of February and we get a lower high in mid-March. That is my more bearish scenario perhaps: a high of 1315-1330 in late January, followed by a correction to perhaps 1180 (?) into February and then a lower high of 1240-1280 in March. Then the market rolls over for real in April. If the market behaves more bullishly, then February’s pullback will be shallower and set the stage for a rally up to 1370 by March. Both are possible, but let’s see what effect the upcoming Mars and Saturn stations will be. I still expect Q2 2012 to be more bearish with a critical time in June and July. A retest of the October low of 1074 is quite possible by that time.

5-day outlook — bearish-neutral SPX 1300-1320
30-day outlook — bearish SPX 1250-1300
90-day outlook — bearish-neutral SPX 1220-1320

The Euro enjoyed a nice bounce last week as the IMF offered more liquidity to the beleaguered single currency region. The Euro finished above 1.29 while the Dollar Index closed above 80. The Rupee ended the week above 50. While I thought we would see a bullish bias to the Euro last week, I did not quite expect the size of this rally. Mostly because I thought we might get some early week downside. However, this never materialized so the late week Sun aspects added to previous gains and took the Euro back near resistance and the 20 DMA. It has now rallied back to a modest level from which aggressive bears will attempt to short once again. This is a somewhat risky strategy now because the Euro has broken out of its falling trend line that began in November. While we can’t preclude another collapse here, it does seem more likely that it will try to extend the rally to the upper Bollinger band and perhaps the 50 DMA at 1.32. Stochastics are on the rise but have yet to be overbought thus suggesting the real possibility of more upside. MACD is in a bullish crossover while the RSI is approaching the 50 line. The Euro short trade is very crowded at the moment, so there may be more upside here, especially in the event of some positive developments coming out of Greece in the coming days. This would create a massive short squeeze, if only temporarily. The next major resistance level would be near the 200 DMA near 1.39. This would be a possible upside target in the event of some major announcement out of Europe. But that is anything but certain now.

This week might see a bit more upside, especially in the early part of the week. However, the Mars retrograde makes this week a bit difficult to call. This should be a negative for risk currencies such as the Euro, and yet there is a fairly bullish looking aspect on Tuesday in the Euro horoscope that suggests the downside may be reversed quickly. For this reason, I wonder if we will have to wait until the second half of the week — after Bernanke’s pontifications on Wednesday — before we get much in the way of downside. Next week looks more reliably bearish as Venus opposes Mars exactly on 1 February. The Euro looks likely to make another move lower until February 8ish after Saturn turns retrograde. It could well remain weak after that, but I suspect that there will be some kind of bottom formed by mid-February. It is possible this could be as low as 1.20, although it probably won’t get down that low. Some bounce is quite likely at the end of February and early March lasting into the Jupiter-Pluto aspect on March 14. This is likely to be a significant rebound back above 1.30 and perhaps higher. Another big swoon looks likely after mid-March and we could easily see lower lows in the spring.

Euro

5-day outlook — bearish-neutral
30-day outlook — bearish
90-day outlook — bearish-neutral

Crude oil slipped as warm winter weather in the US lowered demand prospects in the near term. WTI crude finished below $99. While I thought we would be fairly neutral, the week did not unfold as expected. Instead of declines in the early part of the week, oil rallied back over $100 while the late week was more bearish than forecast. Nonetheless, the overall down trend remains in place for crude as it did not break above recent highs. We have therefore seen a series of lower highs this month. This is a possible indication of further downside to come, especially if new lows are made soon below $98. The technicals look weak here as MACD is in a bearish crossover and appears to be headed to the zero line. RSI is falling also while stochastics is now in a fresh bearish crossover after failing to rise to the 80 line. From a longer term perspective, the 200 DMA is now flat and on the verge of turning lower. The 50 DMA may be preparing for another death cross of the 200 DMA in the event of another correction. In terms of support, I tend to think the 200 DMA won’t act as solid support. More important will be the previous low at $93. If this is broken, then look out below. Until that time, crude may continue to stay fairly high as it benefits from the endless saber rattling in the Middle East.

This week opens up the possibility of more serious downside given the Mars retrograde cycle that begins on Tuesday. Monday’s Mercury-Mars aspect is also not a positive looking influence, although I admit it could go either way. But this Mars retrograde station exactly squares the ascendant in the Futures horoscope so that increases the likelihood of declines this week. That said, I can’t quite bring myself to forecast major downside here. The Mercury-Mars aspect could fail to push crude lower, and there is some midweek upside on the Moon-Venus conjunction that also has some bullish potential. Friday’s Moon-Uranus aspect also looks bullish, although there, too, there is a cluster of planets that make things hard to call. If pressed, I would lean towards some fallout at least from the Mars retrograde Monday or Tuesday, but we could well finish close to current prices. Next week looks more inviting in terms of downside. Venus opposes Mars while the Sun is in aspect with Ketu. Then the week after Saturn turns retrograde so that boosts the probability for more declines. The corrective phase could last into the third week of February. In terms of possible targets, I think $93 will fall away fairly quickly, and we could even approach $80. A rally will likely begin in late February and continue into mid-March. But this is likely to produce a lower high (<$100). Another move lower is likely going into April.

5-day outlook — bearish-neutral
30-day outlook — bearish
90-day outlook — bearish-neutral