Marking up my charts for the start of the week, it occurred to me this one is strikingly, scarily similar in construction to $SPY. What chart is it? Astute observers will notice it cuts off around mid-September. So what was the outcome?

First came the collapse. Then a rebound. Dead cat bounce? Yes…no: the low’s held. A higher high! A higher low! Yet higher. And then a lower high (shriek); and a lower low. Soon, there have been several visits to both sides of the range in a grand consolidation that has frustrated, confounded and fatigued any and every trader taking a crack at it.

All this back-and-forth, strophe anti-strophe is the stuff of Greek tragedy, past and now also present (evidently; but no, the above is not an index/composite of Athens-listed stocks).

It is also the dizzying dance of US indices as they sidle violently from peak to trough. Here’s $SPY itself:

And the answer?

CAD/JPY, part II of II. Yet more proof – this time with a remarkable correlation to US equities that may or may not prove prescient in the next week or two – that a) anticipating a reversal is a fool’s game and b) all other things being equal, trends usually continue after a complex consolidation.

Just ask the bottom-tickers who were sucked into the rising wedge above 77 before CAD collapsed to 73.50 v. JPY in a little more than 24 hours.

The S&P consolidation is nearly complete, and with it part I of II: anything more than a week or two at the very most would be an outlier indeed. What will be the second act?

Brave New World: more prophetic than Nostradamus. As full of existential pique and pathos as Camus ever was. Huxley’s insight is staggering, laying so much bare about our shared condition that is more comfortably left hidden; especially in the confrontation/denouement between The Savage and The Controller in Chapters 16-17. One of the few books I never tire of and make a point of getting around to revisiting every year. A few excerpts:

The Savage stood looking on. “O brave new world, O brave new world …” In his mind the singing words seemed to change their tone. They had mocked him through his misery and remorse, mocked him with how hideous a note of cynical derision! Fiendishly laughing, they had insisted on the low squalor, the nauseous ugliness of the nightmare. Now, suddenly, they trumpeted a call to arms. “O brave new world!” Miranda was proclaiming the possibility of loveliness, the possibility of transforming even the nightmare into something fine and noble. “O brave new world!” It was a challenge, a command.

—

“What’s the point of truth or beauty or knowledge when the anthrax bombs are popping all around you?….Anything for a quiet life. We’ve gone on controlling ever since. It hasn’t been very good for truth, of course. But it’s been very good for happiness. One can’t have something for nothing. Happiness has got to be paid for. You’re paying for it, Mr. Watson–paying because you happen to be too much interested in beauty. I was too much interested in truth; I paid too.”

—

“Violent Passion Surrogate. Regularly once a month. We flood the whole system with adrenalin. It’s the complete physiological equivalent of fear and rage. All the tonic effects of murdering Desdemona and being murdered by Othello, without any of the inconveniences.”

“But I like the inconveniences.”

“We don’t,” said the Controller. “We prefer to do things comfortably.”

“But I don’t want comfort. I want God, I want poetry, I want real danger, I want freedom, I want goodness. I want sin.”

“In fact,” said Mustapha Mond, “you’re claiming the right to be unhappy.”

“All right then,” said the Savage defiantly, “I’m claiming the right to be unhappy.”

—

The Savage shook his head. “It all seems to me quite horrible.”

“Of course it does. Actual happiness always looks pretty squalid in comparison with the over-compensations for misery. And, of course, stability isn’t nearly so spectacular as instability. And being contented has none of the glamour of a good fight against misfortune, none of the picturesqueness of a struggle with temptation, or a fatal overthrow by passion or doubt. Happiness is never grand.”

The October 2008 crash really began in earnest 09/22.  The previous week had brought with it the announcement of the Lehman bankruptcy, resolving in a bullish doji star at SPX 1225-1260 support.  Talk about a Trojan horse.  Once 9:30 a.m. 09/26 rolled around, equity indices opened where they left off at 1255 and saw virtually no reprieve until 10/10/08, a mere 3 weeks and a staggering 356 points further down.  Open to close on SPY, 124.45 to 88.58.

This began a period of more than four months of consolidation: currently the S&P has undergone two. That period is an excellent example to study in comparison with the S&P’s current malaise.  Not because of similarities in the macro environment.  Not because of bank balance sheets, the advent of massive government intervention programs, technical cycles or historic antecedents.

I’m not suggesting this is “another 2008″; or 1937, for that matter; but here are a few observations I find valuable looking back that correlate well to August-September 2011.

1) Consolidation periods can be marked by extreme volatility.  Not all sideways action is stock pong on the 13″ B&W tv circa 1979.

This sounds like something of an oxymoron – consolidation/volatility – but you’re looking at it! For example, during the weeks of 10/13/08 and 10/20/08 SPY printed a high of 104.98 and a low of 83.56. That’s a range of over 200 points on the S&P in 10 trading days; and it isn’t as though that was all in one direction! Trading volatile areas of congestion can be devastating, especially if “trading” entails over-thinking the market/anticipating a breakout that does not emerge, resulting in shorting the bottom or buying the top.

Like an opportunistic infection, I can’t think of a time when cognitive biases latent or overt ravage traders; and judging by the bottom-picking prattle, this time is different.  In contrast, as Jesse Livermore is quoted, “It never was my thinking that made the big money for me. It always was my sitting.”

2a) What begins as pure panic (or euphoria) subsides only gradually – but it does subside, and with that the tenor of the market changes. Compare the range from October with the weeks of 02/02/09 and 02/09/09, with a range 80.63 – 86.89. That’s still 60 points, but the consolidation had tightened considerably.

2b) Time doesn’t always heal immediately; or, just because something looks bad doesn’t mean it can’t get worse before it gets better! Pure panic subsided gradually, yes: only to bring a steep decline in Feb-Mar ’09 before full bearish capitulation occurred. Consolidation periods bringing out contrarians and their vague, mostly untradeable ideas about catching bottoms and bucking the herd mentality. Very, very few people can do this well. Most did it horribly wrong because they thought “blood in the streets” meant a bottom as they built heavy long positions at S&P 800 (SPY 80).  That support level held sturdily; until it didn’t.

3) False breakouts and traps can and do occur – often. The week of 11/17 featured a break well below 80 to a intraweek low of 73.95. Though the week closed at 79.11 (which was a closing low below the all important 80 level): the next week’s close posted at 89.62. These are vagaries of a volatile market.

4) Disequilibrium eventually resolves toward relative equilibrium, before conditions spin out of control yet again. The apparent chaos of 2008 – and the many WTF moments shared by fundamental and technical market observers alike – resolved into a relatively uniform descending triangle. There was a breakout bringing vindication to the bears (well, for a month), the market dropped toward (but didn’t quite achieve) the triangle’s minimum objective; and the rest is history.

The current consolidation has morphed and morphed again.  To those who are frustrated and demoralized by this: adapt or die; or step away!  The S&P does appear to be literally rolling over but charts are never more dynamic than in an environment like this.

One of the virtues of technical analysis, in my experience, is that it doesn’t look down on intellectual curiosity or besmirch outside-the-box thinking as it enjoins a stagnant orthodoxy.  No doubt that’s more about the culture in which I developed than anything inherent to the discipline, but you also pick up on this in just about any TA monograph, publication or article out there.  Like the markets it is set to exact conclusions from, technical analysis is a dynamic pursuit: always evolving and not delimited by boundaries.

There are rules, there are guidelines, there are “best practices”, yes.  Most definitely.  In fact, the MTA continues to develop a level-setting knowledge base with its universally-recognized CMT designation that delineates a professional technician’s skill set from the dilettantish “voodoo” chart scribbling that abounds.

If that sounds elitist: okay.  Justifiably so: professional designations are about keeping charlatan riff-raff from sullying the reputation of those who are legitimate experts in their craft.  Why should the practice of technical analysis alone be subject to an enervating egalitarianism?  Anyone can draw on a chart; anyone can also cut a body open with a scalpel.

Rant done.  So how about gold?  Well, a lot of observers argue that when there’s a crash or a “parabolic” correction so much technical damage is registered that there’s no point in conducting analysis at all.  At that point, it is all about the flattening momentum of the herd as it juggernauts through support level after support level.

That may be true, though it’s a matter of degree only.  Even the Flash Crash bottom had some technical rationale, though it wasn’t actionable in the moment.

But that’s not what happened to gold last week, though it was an historic decline (nothing comparable for 28 years previous).  So how much lower can gold go?

Here are the caveats I repeat over and over but are nevertheless obvious only to some: No one knows and I’m not attempting a prediction.  Only mapping out what I think is most probable if gold continues what it began last week.  But in the spirit of casting technical analysis overboard and free inquiry, I’ll dispense with my own conventions to evaluate the downside with my own elaboration on Thomas Bulkowski’s Bump-and-Run Pattern.  Details on the charts below:

How about that obnoxious cluster of white lines screening out what $GLD’s activity the last few weeks?  Here it is:

Direction continues until it proves that it will not. Easily said, but when this proof emerges is for the trader to decide (read about how trends can work against this here).

There’s no better way to test than by posing substantial technical counterarguments. This week equity and currency markets, especially are on the precipice of change. Whether they’ll go over the edge before them is the question. Here are a few pairs I have my eye on, always asking, “does the prevailing trend stands up to scrutiny?”

Usually the answer will be “yes” – but one can’t know otherwise if they don’t ask and examine.

There’s little question regarding relative strength in the Eurozone.  Core countries such as Germany and France – while not without their own challenges – are the engines of growth and guardians of relative fiscal responsibility in an economic bloc encumbered with the profligacy of its more peripheral members.

There are some sticky problems here.  Countries retaining sovereignty, the back-and-forth about where power is vested regarding fiscal vis-a-vis monetary policy.  Skeptics of the “European Experiment” of a single currency/monetary union have been talking about this stuff since the euro’s inception.  Whatever the EU’s ultimate fate – and that is up in the air more now than ever: these burdensome problems have ironically gone some distance toward resolving the whole core-periphery dichotomy by turning into a full-blown crisis.

Relative strength does and will continue to exist, but as the adage goes “During a panic, correlation goes to 1″.  Weak or strong, at this point EU members are all in it together and that is having a leveling effect on the performance of their individual markets.  Their charts below don’t show movement in lockstep (there’d be no need for multiple charts then, after all), but that none is exempt from the fate of the others is unmistakable.

Germany (EWG)

Germany bounced off the early 2009 low to produce two up-legs between points B and C of nearly equal height and duration.  Nevertheless, the entire move up has ultimately proven to be no more than correction with over half of the previous 27 months’ gain dismantled since the beginning of July and especially since the wedge breakdown at the beginning of August.  Despite the rapid technical destruction of the recovery’s upward progress, Germany’s comparative outperformance among EU counterparts is evident from a review of the following charts.  Still, it is not spared the technical mayhem it’s more wayward brethren may have in store.

 

While we’re on it, how about the DAX?  Looking pretty damn similar of course, but among other things I like how the measured move down on the DAX to 4200 is giving some clarity to the EWG gap down last week and 13.55 target.  As the DAX chart shows, I’m interpreting this as a measuring gap (no other gap type is applicable here) which will take Germany the rest of the way to 4200/13.55 is it behaves in textbook fashion.

Belgium (EWK)

Belgium is given little attention simply because it falls in-between: though, it doesn’t have the economic heft to shoulder any of the EU’s burden, it fiscal state isn’t of the same magnitude of obscenity as the PIIGS.  EWK correlates to this in a way:  it’s repair in the ’09-’10 correction covered a fraction of the ground EWG traversed; however the damage sustained after the break down from its own rising wedge (note flattened, muted similarity to EWG construction above) has not been as furious.  That said, EWK’s harmonic ABCD ultimately targets well below the ’09 lows, while even a retracement to those levels is a 30-35% decline from here.

France (EWQ)

Variations on a theme.  France exhibits a wedge that scores between Germany and Belgium, recovering half what was lost from ’07-’09.  EWQ’s best hope for a floor if it breaks 18 is at 16.50 before a 50% decline from today’s levels is put on the table.

Spain (EWP)

Not as ugly as you might expect, but could be devolving into a technical trainwreck.  EWP is dominated by a symmetrical triangle in which the late ’09 recovery high around 52 (similar to the end of EWG’s first recovery leg) was never recovered.  EWP entered a rising channel off the mid-’10 post-QE1 swoon low at 30 to nearly 46 by early summer ’11 before losing 50% from that high water mark.

Another 10-15% decline to complete an AB=CD to 26.50 will occur below 29.00-30.00.  In line with some of the less catastrophic projections of its peers here.  However, it’s worth remembering at these potential bottoms that the 4 year symmetrical triangle looms ominously.  If the gravity well there takes hold, below the ’09 low at 24 EWP target’s 13.25.

Italy (EWI)

Maybe it’s that all PIIGS look alike, but EWI resembles EWP in nearly every way.  The significant exceptions are that it’s ’09 recovery was tepid like EWK’s (38.2% in each case), but after summer 2010 EWI comes out relatively superior in performance to EWP.  For whatever that’s worth: EWI has broken down from it’s own symmetrical triangle with ’09 low support at 10 and the pattern’s target coming in at 7.50

I’ll still be throwing up charts here and at Chart.ly, but check out my new blog on minimalism in trading at http://www.passagesthrough.wordpress.com

 

After two quixotically bullish risk-off days, safe haven assets (except the JPY, which we’re all buying if only to prove to the BOJ intervention doesn’t work) have taken it on the chin, perhaps none more so than the gold.  With Margin hikes here and abroad exacerbating the downward pressure already brought to bear by moderate rotation out, the yellow metal has given back several days of precipitate gains, breaking the 75 degree trend line it was pacing with settle down around the much more modest 50 degree trendline begun so long and so many percentage points hence (at the beginning of July, around $1490/oz.)

I have no short-term perspective on gold, except that the volatility, volume and expanded range in which it has been trading will more-or-less continue.  The charts that follow are weekly, daily and hourly look-ins on where $GLD has been and where it might go. In short, despite the almost straight-line move up in the past couple weeks, dislocative jolts like margin requirement hikes notwithstanding, the ETF has credible support levels coming in the low $17os and much more so in the mid and mid-high 160s.

 

 

 

 

 

I am not a contrarian (whatever it really means to brand oneself as that), but have felt like a voice crying out in the wilderness this weekend.  Though I’m certainly not a bull at the moment (or maybe I am; what timeframe?), sentiment from sources credible or not seems uniformly and despondently bearish right now.

So: how we looking?  Though the NBER will say nothing of it for a year, a recession now is a foregone conclusion.  The Fed is backed into a corner with popular and political will alike seemingly aligned against further easing.  Constructive political discourse is at a generational nadir.  US fiscal policy is absolute dreck.  The US sovereign credit rating has been downgraded from AAA to AA+ by S&P.  Unemployment remains stubbornly high.  There’s an equally stubborn overhang in housing inventory.  Consumer sentiment is way, way down.  The USD is trading near record lows, Putin thinks we’re a bunch of “parasites”, the hand wringing over losing the USD’s reserve currency status is near record highs, and our President is out doing what he does best: campaigning for President.

Is all that and more enough to send stocks off a ledge?  Maybe so: I don’t pretend to know or really care about the correlative or causal relationships these developments have with equity markets.  As a technical purist I ruthlessly abstain from trying to make those connections because it is detrimental to the process I follow.

What I do find insightful – even if I don’t view it as actionable – is how those who do care are feeling.  And right now they feel pretty negative.  One of the better presentations of sentiment for example, provided by The Technical Take suggests just that. Maybe those I’ve read or that have been polled aren’t entirely wrong, but my read here is that they aren’t entirely right.  That negative sentiment seems almost universal makes any rational basis for optimism that much more important to evaluate.

The S&P is in a secondary trend down from the late April high.  We know this and accept it, giving us two similar lines of inquiry.  The first asks: how far will the current correction extend?  How this question is answered determines whether shorting opportunities continue to exist.  The second:  where will the S&P bottom?  This questions asks when optimists will capitulate, when the bleeding will finally stop, and where the most viable entry long may be taken.

The almost unchallenged assumption is that the market will continue to decline.  Contrarianism, if nothing else, informs us this is an appropriate time to look in the opposite direction.

Could the market bottom here?  Whether it will or won’t doesn’t matter: only to concede that yes, it could. A bounce off the descending channel trendline at the 78.6% retracement of the range put in by these diamonds could enter a short-term floor, and indicative of a possible, more durable double bottom.

Next is one of those ludicrously noisy charts; but ignore the lines in favor of the blocks, which are each fields that represent fibonacci cluster support.  Note where SPY came to rest on Friday and what lies immediately beneath: the density of that block (which coincides with where the Inverse-pre-QE2-H&S was last summer) could provide enough resilience to punch in that double bottom I mentioned here.  That a DB sounds almost comical or even a little desperate here is indicative of how far and how fast we’ve moved toward a bear market.

As though the previous chart wasn’t enough, this weekly SPY and it’s tangled morass of fibonacci retracements/projections/extensions looks completely absurd at first glance.  The message isn’t in the component lines but instead with the zones where these values cluster and how price has behaved around them far into the past.  Think of it as one of those Magic Eye pictures.

Similar presentation below but with different studies and values.  The areas of support, however, are much the same.

 

Of the two lines of inquiry I mentioned above, these charts have been about how much further there may be to go, and where footholds are along the way down.  And even though I am not a contrarian, if I knew one who had a strategically credible approach, I imagine it would feature something like this: