Home > Uncategorized > 2013/01/22: Calendar, Japan and ‘Sherlock Holmes’ Equities Psych

2013/01/22: Calendar, Japan and ‘Sherlock Holmes’ Equities Psych

© 2013 ROHR International, Inc. All International rights reserved.

The Weekly Report & Event Calendar is available through the link in the right hand column. This week’s Summary Perspective will be added sometime soon. Yet, in addition to the calendar are two key areas of interest we want to cover today: Japan and the degree to which the Equities psychology remains very positive in spite of some obvious headwinds.

First of all, the combined Bank of Japan and Japanese government anti-deflation program announced today is as breathtaking in its scope as it is quirky in its implementation. If they are so committed to ensuring the inflation rate ramps up to 2.0%, why are they deferring the extended additional asset purchase program until the beginning of next year? We suppose there is quite a bit of anticipatory psychology they expect to accomplish their ends without actually doing anything in the near-term.

Mr. Bernanke has shown how well that works on the Fed QE-Infinity program, so why wouldn’t Japan try it is well? Of course, the truly scary part is the degree to which they expect inflation to go from barely positive this year to something in the 3.0% area in 2014. That not only seems astounding as a prediction, but may well hold other risks to the Japanese government financing ability. They should be careful what they wish for.

Back to more mundane if still fairly exciting matters, the March S&P 500 future push above the 1,474.50 major September lead contract high. In essence amounts to the ‘jailbreak’ we had discussed in the Rohr-Blog US Equities Attempt a Jailbreakpost last Friday (in the wake of Thursday’s gap higher into that area.)

The bottom line is that in spite of this morning’s minor setback the bulls still own the trend unless and until the bears can get the market to Close back below last Thursday’s 1,470.70-1,465.60 gap higher. One of the key technical aspects that assisted Friday’s late session recovery was the inability of the bears to leverage the weak Michigan Sentiment number, as the March S&P 500 future held exactly at the 1,470.70 top of that gap. 

Click on Chart to enlarge

Click on Chart to enlarge

And in spite of our skepticism toward the equities across the first quarter, that all fits in very nicely with the broader technical projections allowing a move up to the low 1,500 area prior to the lead contract S&P 500 future being overbought once again. It is all about the confluence of factors we discussed in the previous Thursday’s (Jan. 10) Might US Equities Attempt a Jailbreak? post.

Once the equities demonstrate that the bears will not likely be able to force a Close back below last Thursday’s 1,470.70-1,465.60 gap higher, the path of least resistance becomes up; at least until they hit the next significant threshold.

We laid out the theory and practice behind that in a bit of a broader analytic psychology as to why the equities could continue lower in late 2008 in spite of how far they had already fallen. It all has to do with the combined perspective of Sherlock Holmes and Dynamic Disequilibrium

 

…which you can read yourself in the archive from our now retired Capital Markets Observer (Volume IV Number 17, November 21, 2008.) You do not likely need us to tell you that the markets are dynamic and exist in a constant state of disequilibrium. So rather than freeze in place (like the proverbial deer caught in the headlights) when faced by confusing factors, they tend to seek out the path of least trend resistance.

Figuring out what that might be at any point can be relatively challenging if using a purely deductive approach. However, by weighing factors on both sides and inferring which is least likely to occur, a significant insight on which way the market might be headed can be arrived at by elimination of the most unlikely scenario. It is much the same as Holmes once said Watson, “…when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

Of course, the difference between the markets and the reality that was the subject of Holmes’ investigations is that nothing can be presumed to be ‘impossible’ in the markets. However, some sense of what is ‘very highly improbable’ on both a fundamental and especially technical trend basis can be a very helpful bit of insight.

And in spite of the headwinds that are likely to blow up sometime later this quarter, on current form it is very hard to doubt the upward momentum of the equities unless there is a March S&P 500 future failure back below 1,465. And as noted in the in-depth technical discussion from the blog posts referenced above, unless that occurs sometime soon the market does not become overbought into significant resistance once again until the low-1,500 area.

Thank you Sherlock.

General Market Observations

As the March S&P 500 future tendencies have been extensively discussed already in the general background post, the only thing we would care to add is that is now consistent with previously lagging equities also performing well at present. While the German DAX that led the way up through with 7,500 resistance since early December is now stalled against 7,750, that is understandable in light of the sharp appreciation of the euro.

And spite of settlement weak economic news, the FTSE has finally pushed above its 6,100 area Quadruple Top from the first half of 2011. Given it had failed to push above its 2011 high along with the US and other European markets last year, that is also quite a positive near-term sign. And the previously endlessly struggling NIKKEI has both put in an UP Break from 10,000 at the end of December, which it confirmed by exceeding 10,200 area highs from back in mid-2011 and early 2012.

So it is not just the US markets leading the way up on a Buzz Lightyear Bernanke “QE Infinity and Beyond” risk on rally. Even allowing that it may all be global quantitative easing, low-or-no interest yield driven, the equities rally is now broad-based enough that it would take failures across multiple regional centers to upset the uptrend in the near-term. And once again, in the current context that includes continued lack of US fiscal rationalization, that being so ‘very highly improbable’ seems to support the extension of the equities rally to it least the next quantum significant resistance areas.

EXTENDED TREND IMPLICATIONS

The most telling influence into the other asset classes has been the weakness of the primary government bond markets. That said, each has been able to hold for now at some key lower supports. The March Gilt future failure below important 117.50-.00 support turned that into resistance, and puts it back into an entire lower range. However, at least so far it has been able to hold interim 116.30-.00 support. Similarly for March Bund future that also failed key 143.75-.50 support, its 142.62-.30 support has held on a couple of tests.

The outlier is the March T-note future that only just barely sagged below its critical 131-16/-12 support after the US Employment report, and has not significantly challenged it since then. Any weekly Close back into that range would leave the T-note as damaged as the Gilt below some significant Fibonacci levels and congestion. While there is some interim support is nearby as 130-20 (the December 2008 spike high), more major support does not occur once again until the upper 129-00 and 129-00/128-14 areas.

It is also of note that the US Dollar Index fared so poorly in the wake of the upbeat communication out of the ECB press conference two weeks ago. As noted previous, the public seems to have bought into the headline “The (euro) House Is Not Burning” for now. That drove the US Dollar Index back below .8000 toward its low-.7900 to .7860 support. However, that seems to have a bit of a delimiter as well in the form of just how far EUR/USD is ready to rally right now. While the surge also Negated a near term 1.3200 DOWN Break (now near term support along with the previous 1.3250-80 range), heavy resistance (congestion, DOWN Break and ultra-long term MA) awaits in the 1.3450-1.3550 range. Fundamental factors come into play as well: just how strong a euro is desirable or sustainable for a Europe in an extended recession? The rumblings from the European powers-that-be did not take long to materialize after we had mentioned that at the top of last week.

And it is obvious this is secular strength in the euro rather than US dollar weakness. Note the GBP/USD very temporary extension above 1.6300 serial highs quickly failed back below it, and has now failed key support in the 1.6000-1.5950 range as well. That puts it back under pressure into the 1.5828 November low, which was a bit of an anomaly in light of the next real support being 1.5750.

That euro strength versus any secular US dollar weakness even goes for the ostensibly Asia-assisted Australian dollar. It is of note that the past two weeks’ AUD/USD rally above 1.0450-1.0500 has stalled at recently generated resistance as nearby as the 1.0600-25 area. It all feels a bit stretched, and unless there is more general US dollar weakness, all of that reinforces our hypothesis on the early year economic improvement possibly being no more than a positive holdover from late last year.

And the really aggressive trend in foreign exchange remains with the sharp weakening of the Japanese yen. That is so in spite of the near term bounce from the surprisingly deferred BoJ and Japanese government “Open-Ended Asset Purchasing Method” included in the new anti-deflation plan. After the USD/JPY February rally above key resistances at 78.35 and 79.50 were UP Breaks, 84.00-.50 was key resistance.

Back above it after the prolonged retest of those UP Breaks was a major confirmation of the overall UPturn (i.e. yen weakness.) Pushing above 85.54-.94 resistance as well left it even violating far more critical 87.50-.00 resistance three weeks ago. As two weeks ago, that was also near term UP Acceleration. As such, holding retests of that area (with a Tolerance to last year’s 86.75 Close of the year) will continue to maintain that UP Acceleration.  As far gone as that trend may feel, next significant resistance is not until the 91.00 area, and our intermediate term Objectives remain 94.00-95.00 and the 100.00 area.

Thanks for your interest.

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