Scylla and Charybdis

Scylla and Charybdis

Courtesy of Springheel Jack

(From Market Shadows Newsletter)

Most of the Elliot Wave analysts that I watch are abandoning counts showing significant further declines this year, and they could be right. Nonetheless, the overall technicals look grim and the fundamentals seem weak. It’s hard to see a big move up over the rest of 2012. The UK is finishing the third quarter of a recession, and the EU is most likely also in recession. The US economy looks weak and may drift towards a recession, with the ECRI  predicting that the US is already in recession.  Doug Short points out that the U.S. is not currently in a recession, but the ECRI view is worth noting. It was founded in 1996 and has correctly predicted two U.S. recessions since then with no incorrect predictions between. Stock markets historically don’t do well in recessions.

On the technical side, there are four main related markets that I tend to watch as indicators of market health and they all look sickly.

The first is copper (positively correlated with equities), where I posted the large head and shoulders pattern (H&S) forming there last week. The second is the US dollar (generally inversely correlated with equities), which is showing a very bullish looking technical picture. This week I’m posting the updated EURUSD chart to show the huge H&S forming there that will be complete when EURUSD reaches the neckline in the 1.20 area:

 

 

The third is bonds (also generally inversely correlated with stocks). My long term TLT chart is showing a clear breakout from the long term rising channel. There’s a possibility of a double-top if we see a reversal below 124 here, but that’s purely speculative, and 65% of double-tops never reach the valley low, so the overall bias is bullish for bonds:

 

 

The fourth and last is Emerging Markets ETF, EEM – positively correlated with US equities. The chart for the EEM shows another large H&S forming:

 

 

The technical/fundamental pictures are not encouraging. On the fundamental side, a recession is already in the UK and (most likely) the European Union. The eurozone itself is experiencing crisis after crisis.  I think there is a good chance that the weakness in Europe will spread to the U.S. more significantly. On the technical side, the four widely watched equity-correlated indexes are close to triggering high probability major moves that have generally been correlated with falling equities. There are a couple of caveats here. First, in the context of a rising US Dollar, US equities may do badly but they will most likely outperform non-US equities if money continues flowing into U.S. assets. Second, these very bearish looking setups may fail, but at the very least, there is definitely strong reason to be cautious on the long side.

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