The crisis of the day is the political warfare in Washington that is closing down the U.S. government.
While the games of bluff and bluster are likely to continue, the market’s technical indicators are setting up for a downside move that the political games will probably exacerbate.
BEARISH DIVERGENCE
Briefly, we are establishing a bearish divergence between price and momentum indicators that usually ends in a significant decline in price. The chart tells the story:
Chart: Weekly chart of S&P500 mini futures (ES).
The intermediate-term indicator (MACD) has developed a negative divergence with the price. The price has moved higher, helped by the Federal Reserve’s decision to not “taper” its bond-buying program, while the momentum has been declining.
The indicator shows the move up is weakening. At some point, the price will have to retrace back down, perhaps to retest its breakout point. We still have several unfilled gaps created early in September when the ES (S&P mini futures contract, a proxy for the broader market) made a momentum breakout move. Those are likely targets for a retracement.
Initially the ES had looked a little tired around the 1705 level. Then the Federal Reserve announced its “untaper” and started a another momentum breakout. But the bounce ended at the first Fibonacci extension level and promptly moved back down.
To us, it looks like the market ran through the bounce quickly, and then reverted to the original game plan. The “untaper” appears to be nothing more than a momentary distraction – although it did move the price close to one of our initial targets.
NEAR TERM TREND
Now the near-term trend is down, and it is likely to remain down for a while until the U.S. government solves its problems.
However there is also a distinct possibility things will get worse, rather than better. After the government shutdown, the next big issue is the debt ceiling, which has the potential to be much more damaging.
While there is always the possibility that sanity will suddenly overwhelm politics, that isn’t the smart trade. If the “fiscal cliff” makes a reappearance later this month, it is likely to change the intermediate-term direction of the ES, which at this point is still bullish.
We would then have both the short- and intermediate-term trends pointing to the downside, with substantially more risk of further declines.
LAST STAGES OF LONG TERM BULL
We believe the market is in the last stage of bull market. If we are not carefully to keep it going, it can easily awaken the bears, and fall into a long-term bear market.
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