By Jay Norris, IBTRADE Chief Market Strategist

Some of our clients know me as a bull. I do not deny that. The most influential events in the market over the last three years were the two QE’s, and the asset class rallies they fueled. Bull bets from stocks to currencies to commodities paid off. The question I ask myself now is what will happen when the bull rolls to a bear next time, and central bankers around the Globe let private industry take their medicine, instead of back-stopping the whole system as they did in 2009?

While U.S. stocks are still showing a bullish trend over the last 3 years, they are exhibiting a bearish pattern of lower highs since the May top. The first sign of weakness in U.S. stocks would be if they do not make a new yearly high between now and the end of December. That would be bearish; if they do not even attempt a rally from current levels, and turn lower that would be more bearish – see Figure I. The current market pattern seems eerily similar to the 2007 – 2008 top. We also need to monitor the size of any correction following this most recent rally from the October lows. A fifty percent retracement back down to 1180 basis S&P 500 future would be normal; beyond that, managers will get very nervous.

Figure 1

The overwhelming concern for stocks going forward is the U.S. consumer’s behavior heading into a new year. If they continue to pay down debt it means less spending. If they turn back to credit it undermines their investment plans. Either way it isn’t a rosy scenario over the near-term for asset class markets. And given that U.S. stocks are the current alpha market, will all the other markets, including commodities, follow them lower should a down-tern occur? I would bet on it.

The Euro is another market where over the last year and half it’s exhibiting an up-trend, but since May it’s down – see Figure 2. The Euro is also right on top of a critical level in 135.00. A breach of that figure likely means a test of 130.00 below. The thing about the Euro though is that central bankers around the world don’t want to see it go lower, because that means that what interest private sector bankers and dealers do earn, after all the write downs and hair-cuts, comes back to them devalued. They would rather see 140 than 110.
Mean time the long-term pattern on the weekly chart in Figure 2 does not exactly lend confidence to longs. Over the last 4 years we see an obvious pattern of lower highs and lower lows, with price currently just hanging on to the top half of a hard fought bear channel. To see 110 over the next year does not seem unreasonable given its overall stance.        

Jay Norris hosts Live Market Exercise where he spends 12 hours per week pointing out trade set-ups and signals in live markets. He is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.