The Longer Outlook in …..The Nasdaq 100

by Greg Harmon

The Nasdaq 100 has a long history for being the index for technology stocks. This was a great assumption for the early 2000’s, but now the index is laden with biotech companies as well. This has been good over the last few years as the strength in biotechs has benefited the Nasdaq while tech stocks have weighed it down. This has propelled the Nasdaq 100 near the 2000 highs, the height of the tech bubble. This is the last major index that has not made a new all-time high. Perhaps a rally in tech names will get it there. But the chart suggest it might take a while.

The monthly chart going back past the tech bubble peak is very clean. There are two main stories involved. The first is the harmonic Bat playing out, shown by the two triangles. This bearish Bat is just 11 Nasdaq points away from the Potential Reversal Zone (PRZ) at 4358. Close enough for chart art. A move lower from here would look for a retracement of 38.2% of the pattern, or to 3278.

But the funny thing about a harmonic Bat is that it can morph into a harmonic Crab. No magic spell involved, just a continuation over 4358. This would move the PRZ to 6350. There are a couple of ways this could happen. It could just continue higher. It could pullback, but less than 38.2%, and then move up to the new PRZ, or it could move sideways and then higher. Of the three, the last two carry a higher probability.

There are a couple of reasons for this. First, the index is overbought on the momentum indicators. The RSI has been running over 70 for over a year and a quick look at the price action shows that historically it has not behaved well when this ends. The MACD is not close to the extreme level in 2000 but it is well above all other levels when you pull that out. It is also starting lower towards a cross down. These could produce either a pullback or continued consolidation.

But Elliott Wave principles raise the probability of a flat move or small pullback. The price action from the 2002 low to the present looks like the first 3 waves of a 5 wave impulse higher. One of the Elliott Wave principles is that the two corrective waves in the 5 wave pattern often are of different character. That is if one if flat the other trends or zigzags for example. In this case Wave II trended lower, so Wave IV would be expected to be flatter.

Using that concept and a similar timeframe for Wave II could see Wave IV ending at 4000 in early 2016, before a final Wave V higher to between 5500 and 7500. The Crab PRZ is nearly in the middle of that range. All of the bullish cases for the longer term fail on a break below 3278 and a then a target of 2328 arises, or a 61.8% retracement of the original Bat pattern.

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US Dollar Reversal

by Short Side of Long

Chart 1: The strong US Dollar rally is finally showing signs of weakness

 

Source: Fin Viz (edited by Short Side of Long)

Over the last few sessions, we have potentially seen first signs of weakness in the powerful US Dollar rally, which started in early July of last year. While I do not think the US Dollar bull market is over yet, there is a potential for a serious correction in coming weeks and/or months. Obviously, this should impact many asset classes, which I wrote about several weeks ago:

If the correction in the US Dollar would occur in coming weeks, it might boast many different asset classes. Firstly, the dramatic crash in Crude Oil could finally find some sort of footing. Stabilisation in energy prices could help energy stocks as well. Foreign currencies such as Japanese Yen and Australian Dollar find themselves at major historical support levels of 120 yen and 0.80 cents, so both of these could rebound for awhile.

Emerging market currencies have been under pressure recently, so a peak in the greenback could stabilise these currencies and put a bid under the extremely cheap emerging market equity complex. Finally, as already discussed in previous posts, Gold has been holding up well despite the Dollar rally. Therefore, Dollar weakness might only further strength Gold as it attempts to break out into a new uptrend.

Chart 2: Bullish sentiment has remained at super high nose bleed levels

 

Source: SentimenTrader (edited by Short Side of Long)

US Dollar could correct for awhile, either in a form of a prolonged consolidation or even possibly an initial sharp reversal sell off. The truth is, bullish sentiment on the currency is ridiculously high and a major shake out could occur at any point in time. If we observe Chart 2, we can see that the Public Opinion (thanks to SentimenTrader website) has been at nose bleed levels and recently hit a record high.

At the same time, commitment of traders report (thanks to CFTC), shows that hedge funds and other speculators hold an extremely high level of net long contracts. Every man and their grandmother expect higher US Dollar. Honestly, so do I, as I've been long since the summer months of 2014. All of this means that the trade is probably overdone, way too loved, over-owned and overbought... at least in the short term.

Pay attention to the USD index in the next few weeks!

Chart 3: Hedge funds continue to heavily sit on the long side of the trade

 

Source: Short Side of Long

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2008 Deja Vu: GMAC Confirms SEC Probe Of Subprime Loans, Will "Investigate Itself"

by Tyler Durden

While not entirely surprising, the fact that GM Financial has admitted that:

• *GM FINANCIAL: SEC PROBING SUB-PRIME LOAN SECURITIZATION

Of course, we should not worry about this... we are sure it is "contained" as GM reports it is "investigating matters internally" - just like it did with the ignition switch year ago?

Via GM's 10K,

In July 2014, we were served with a subpoena by the U.S. Department of Justice directing us to produce certain documents relating to our and our subsidiaries’ and affiliates’ origination and securitization of sub-prime automobile loans since 2007 in connection with an investigation by the U.S. Department of Justice in contemplation of a civil proceeding for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

Among other matters, the subpoena requests information relating to the underwriting criteria used to originate these automobile loans and the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile loans. We were subsequently served with additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to our sub-prime auto finance business and securitization of sub-prime auto loans.

In October 2014, we received a document request from the Securities and Exchange Commission in connection with its investigation into certain practices in sub-prime auto loan securitization.  We are investigating these matters internally and believe that we are cooperating with all requests. Such investigations could in the future result in the imposition of damages, fines or civil or criminal claims and/or penalties. No assurance can be given that the ultimate outcome of the investigations or any resulting proceedings would not materially and adversely affect us or any of our subsidiaries and affiliates.

Nothing to see here, move along... the rebirth of the subprime lending bubble...

and the delinquencies are alreasy surging...

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