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Fruit Salad in the Land of the Banana Republics

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Tension is on the tape heading into quarter-end.

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I've been trying to figure out exactly what it is I need
Call up to listen to the voice of reason
And got his answering machine

-- "Reckless Serenade," Arctic Monkeys

Insane people are always sure that they are fine. It is only the sane people who are willing to admit that they are crazy.
-- Nora Ephron

Those are my principles, and if you don't like them… well, I have others.
-- Groucho Marx

Let's face it: We've gotta be crazy trying to figure out this market day by day by day. In an environment that's short on rhyme and reason and long on rhetoric and cognitive dissonance, all we've got is gyrations and words. Every day is a reckless serenade of explanations and opinions as to why the market shrugged off one ray of news, only to embrace another.

To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown -- the first instinct is to eliminate these distressing states. First principle: Any explanation is better than none... the cause-creating drive is thus conditioned and excited by the feeling of fear.
-- Friedrich Nietzsche

Instead of connections and chords that reverberate with clarity, all we've got are sour notes and hoots and hollers from the bull camp, while the bear camp is stuck on one-day stanzas of high-frequency trading -- a stun gun lullaby that everything is normal.

Semaphores substituted for sense -- kisses of price that don't stick, driven by the perception of risk rather than value.

Are we the republic our forefathers wanted us to be?

Are the capital markets still free markets of security for securities where businesses and governments can raise long-term funds?

A capital market is defined in Economics: Principles in Action by Arthur O'Sullivan as a market in which money is provided for periods longer than a year.

The capital markets have been completely transformed. What was once the nation's most important driver of job creation is now a self interested lobby of constituents that no longer function as intended. From day traders to high frequency traders, from dealers of derivatives to those whose sole impetus is to create financial constructs, from a compliant Congress to an ineffective SEC no longer interested in aggressively pursuing the goals of its own mission statement, the arena is no longer suited for investors, nor is it about investing anymore. It is about momentum and about the moment. It is all transitory, investment plays no role. In the temporal timeframes we see today, valuations are not only NOT important, the time required to parse valuation estimates is an utter hindrance. In this environment then, ALL valuations must be suspect. The average holding period for shares runs less than 48 trading sessions (compared to the average holding period for stocks from 1926 through 1999 of 44.4 months). If one buys to hold for a year, valuation has to be consideration. But the shorter the turnover, the less relevance there is to utilize any sane form of valuation. And if valuations are not employed, then how in heaven's name are prices to be trusted? Given recent average volume, SPY trades its entire capitalization and then some each and every week. Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest. Prices simply cannot be trusted."
-Alan Newman

You want to know why the public is repelled from the market and why volume has declined throughout the last three year's 100% advance?

Because prices simply cannot be trusted.

Price can't be trusted in the capital markets any more than our elected officials can be trusted to not sell out to lobbyists and special interests.

Be that as it may, price is the point of the sword, even if it's the Sword of Damocles. As traders, it's all we have: Price is the final arbiter even if Mr. Market acts like he's taken a big shot to the head, along with a crack addiction.

Price wasn't so much swearing yesterday. It was more muttering and meandering: after testing Monday's lows, the SPY left a 10-min Bottoming Tail and a first hour low. After getting hammered on Monday, the market took another breather, just as it did on Friday following Thursday's pounding.

While our key S&P 500 (^GSPC) time/price squareout held once again at 1313, Tuesday's pattern looks like it may be a fractal of last Friday's Bear Flag.



A change in behavior on Wednesday could be a tell. In other words, if the market doesn't succumb to selling pressure again after a consolidation, it may mark a short-term change in behavior.

However, the T-Rex in the Ointment is that then we get Thursday and the ObamaCare Scare, the scheduled contempt vote against Attorney General Eric Holder, and then there's that pesky EU summit which we are once again obliged to believe is crucial. Again. If they could figure out a way to package and export 'summits,' they might be on to something. Then of course, there's quarter-end window dressing but a lot of mannequins are already in triage, having lost a limb here or there in recent weeks.

So, the market may sleepwalk and tread water today.

It's another make-or-break, boy-cries-wolf summit where expectations are low, so you never know if they'll wave their flags as Angie walks by or whether their hypnosis goes unnoticed.

Can Germany really French kiss? After a generation of trying to get this European Onion, as Peter Atwater refers to it, not to stink and make the world cry, can 17 countries really give the type of kisses where teeth collide in a fiscal, not just monetary union?

The market is coiled and tension is on the tape going into quarter-end. Given Tuesday's action, which held key support, the bulls are primed to squeeze and protect the baby. While the NYSE's percentage of stocks above their 50 dma is bearish, showing a possible waterfall setup of three lower highs, a break above the declining trendline could see a stampede.



The key numbers to watch if a breakout occurs going into the third-quarter turning-point anniversary of the major higher low from July 1, 2010 are 1363.46 on the S&P 500 and 12899 on the Dow Jones Industrial Average (^DJI). These are the June highs. If the monthlies turn up, the subsequent behavior will be key. If the market is bearish, the turn-up of the monthlies should define a high soon in terms of both time and price. If the monthlies turn up and the market acts well, it implies the possibility of a multi-week rally, probably into the five-year anniversary of the July 19 primary high in 2007.

Conclusion

Pulling back the lens to see the big picture shows something I haven't seen anyone mention: an outside-down monthly reversal bar on the DJIA in May. A return rally on a turn-up of the monthlies that stalls out probably leaves a monthly pivot top, a high surrounded by two lower highs on the monthly chart.



Form Reading Section

On Monday, we sent an intraday alert that Nu Skin Enterprises (NUS) was set to rally higher. NUS should be on the long radar for today. Offsetting the reversal signal bar on the dailies from 6/21 is bullish and suggests a successful attack of the overhead 50 dma.






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No positions in stocks mentioned.

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