Another week of historic events interrupting the markets

Markets rallied to key resistance levels and have to make an important decision this week. After two weeks of testing the bottom and coming to the middle of the range, will they fade here or go to the top of the range?

It’s a mixed market with the Transports gapping up to start the week, but oil seems to have found a near-term high but violated the high it made earlier in the year. That’s important because oil stocks have been such a great leader recently. Recall that in the choppiness of a little over a week ago when the Dow retested the low oil stocks was one of the better-looking sectors. It survived the retest of the low to break free last week. You can’t say we didn’t see it coming. But biotech and the semiconductors appear relatively flat to start here by comparison. Could we have divergence before the next leg down?

We’ve just had another week where historic events interrupted "business as usual" for the markets. I’ve had a lot to say about domestic annoyances in recent months and especially since the end of January when the Dow topped. But now we have a real geopolitical problem. Before I get to that, I stumbled into a New York Post story yesterday by John Crudele. Longtime readers of this space know I consider Crudele to be my point man of expertise when it comes to the monthly jobs report. He knows employment numbers like I know square outs.

He basically lines up with a lot of what I’ve been saying for a long time and was proven correct the week after the Dow top when the FISA memo was declassified. It’s hard to move on with business as usual when an attorney of the President of the United States has his rights violated the way they were last week. It was none other than Newt Gingrich who said last week’s events was a breakdown of Constitutional law. But if that was all markets had to be concerned about, it would be sufficient. It’s a shame people like Crudele and myself who have our own financial expertise must spend so much time talking about this sort of thing.

I’m not going to get into why the United States attacked Syria on Friday night. I’m here to tell you we dodged a major bullet because if the attacks continued and/or the other side retaliated the Dow would not be up this morning. Let’s be clear about that. As far as the market is concerned, it never happened. We witnessed a geopolitical event that was very emotional to a lot of people and it was reported to the public on a Friday night, after the markets were closed. The Friday night of a news cycle allows the crowd to digest the information during the weekend. By the time Sunday night rolled around the market was already moving on to the next issue. As a market historian, I’m also here to tell you we won’t have a “Teflon Dow” if and when the real fighting starts. I’m not going to make predictions but what I can tell you is historically speaking, financial markets are allergic to war. The problem with war socionomically speaking is if they start at a point where social mood is near the peak, its decline sparks the drop in the stock market. The next problem is the bigger the drop, the angrier the mood of the crowd which spawns more selling until it becomes a continuous feedback loop.

The best example is WWII where the Dow was near the top of its range when it started and didn’t bottom until 1942. By the time the Dow bottomed, Pearl Harbor was already in the rear-view mirror and the Nazi armies were dominating places like Alexandria, Egypt and capturing the Rumanian oil fields prior to the fight at Stalingrad. Those were some mighty dark days and victory by our side was far from assured. All I’m saying here is if the fighting in Syria continues as far as our coalition is concerned, next time it might not conclude by the time the weekend expires.

Here’s some of the resistance I’m looking at. Take the BTK for example. There are all kinds of interesting relationships embedded in this chart. First of all we had a 736 range for the first leg. We go out 73 bars and draw a line. For the second leg down, which is 4931we go out 31 bars. What you see are balance lines at a similar latitude on the chart. This is where biotechs have stalled. On the bull side the 92% retracement gave way to a gap down at roughly 92 hours. That line is now support given its also the gap. We know there is a gap there, I’m telling you why the gap is there. This test is about whether this resistance level holds because other charts have similar issues. If it does, there is underlying support here but also on charts like the Dow which is defending its 23344 bottom at 44 days. It’s a potential recipe for a sideways pattern.

Markets are concerned about geopolitical events in other ways. Oil stocks have been on fire lately and it’s a perfect storm as they were spooked and stoked by war fears but don’t look now, oil is at the meat on the bone part of the cycle. They are only six weeks out from the peak of the driving season. They hit new highs last week also confirming my original thoughts the long-term picture was less than ideal for a major correction back in January. I thought we’d get more out of the retest of the high, but the energy complex had other ideas. Oil is slightly off the high and I don’t think this is a case of buy the rumor because there is no guarantee the attack on Syria was a one-off deal.

With all that is swirling around, it would be a miracle if an important war didn’t break out within a year and I’m starting to believe the domestic situation will lead to a Constitutional crisis that makes the Nixon era look like a walk in the park. None of it will be good for financial markets. What does that mean for right now? It will be tough to get a leg down while oil is going higher but as we’ve seen in 2008, there is a limit to how high oil can go before it becomes a tax on the economy. Right now, it’s important to stay in the moment and see how markets respond to these resistance levels.