Happy MLK weekend! Before I begin to dissect the current state of the bear case, please allow me a moment to celebrate and honor a great man.
"Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that."
- Rev. Martin Luther King Jr.
Throughout my life I have marvelled at examples of the differences between how the world operates versus how genuine men and women of God operate. Take for instance the difference between how our current government/military operate versus how MLK led the civil rights movement in the 1960's. The U.S. military enforced violent change in Afghanistan, but it will not last. The world's method of change, through force, although realizing some short term changes, does not last. In contrast, MLK and other civil rights advocates during the 1960's endured violence, hatred, discrimination, and untold horrors….however their response was the key to long lasting change.
In the short term, it many situation, it seemed there was no success/change. However, long term change requires roots. Their key was sowing the kind of life they wanted future generations to reap. When faced with hatred and violence, they responded with love while continuing on with their campaign of social change. The fruit of their work endures today, and continues on.
Now on to the charts! At this point, what do the bears need? A reversal. As I forecasted in my market update video at the end of Oct last year, we broke the large wedge that had formed on the major indices, followed by a backtest of the wedge breakdown. We have backtested the wedge, and even more… At this point, we need a reversal for the bear case to remain intact…and soon. Below, on the $DJI chart, you will also notice the two green trendlines I have drawn, comparing the current setup to the setup preceding the Aug '11 sharp decline. For this scenario to play out, we'll need: a swift reversal soon, a breakdown of the green trendline, followed by a sharp decline below the Oct '11 low. Is this probable? Let's look at some other charts for clues.
Next, let's look at the FXE. This ETF, as you know, tracks the EUR/USD. The EUR/USD reached its peak in 2008, at which point I contend it entered a secular bear market. The latest cyclical bear in the Euro lasted from May '11 through July '12, as you can see below. The rise off the July '12 low appears to be ending. You can see 2 MACD negative divergences coinciding with the wedge formation drawing to an end. Is the bear about the return in force for the Euro? I would say the probability is high.
You can also see a similar chart in EWP, the Spanish ETF. This chart also shows a sharp bear flag uptrendline, accompanied by a negative MACD divergence.
Lastly, let's take a look at energy. Suncor, SU, continues to be a chart that I follow closely, along with USO. Coming off of its 2008 low, SU formed a clear rising trendline. The stock made its high in March '11, started to decline, and then made a powerful decline as it broke its trendline coming off the 2008 low. Interestingly, SU diverged from SPX, not going on to make new highs above the 2011 high. Since the Oct '11 low, SU has consolidated nicely, and appears prepared to resume a decline if it can break under the trendline shown.
The final chart is a comparison of USO vs SPX. I show this only to exhibit the striking divergences SPX has made relative to USO. Throughout 2011, oil and SPX traded roughly in unison. However in 2012, SPX diverged higher from May-Sept 12', and Sep 12'-Jan 13'. I would suggest this is simply another indicator of approaching intermediate term SPX weakness.