What matters, as I say, is the background, not the foreground because the foreground is where everyone is looking. What matters in financial markets -and in life? -is not what you see straight ahead but what you glimpse out of the corner of your eye. ~ John Percival “The Way of the Dollar”

In this week’s Dirty Dozen [CHART PACK] we discuss major breakout failures plus major breakdown confirmations. We look at troubling developments in breadth, the looong lag of monpol this cycle, and end by covering the strength in both DXY and gold, plus more…

1. With only two trading days left in the month, it’s looking like the SPX will end October at its Apr 23’ breakout level (around the 4,100 range). A significant move below this would negate the previous breakout and put the odds strongly in favor of a move back toward the Oct 22 lows.

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2. RTY is also looking like it’s going to end the month on its lows. A failure to soon reverse here would kick up the odds that the broader market is entering a larger downtrend.

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3. Breadth is getting oversold but if you look at RTY aggregate breadth (across multiple timeframes) as a percentile, we can see that it’s still above the depressed levels that tend to mark major bottoms.

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4. And we’ve been pointing out the deteriorating picture of longer-term breadth for the past two months. These indicators continue to deteriorate in a way that is certainly not reflective of a new cyclical bull market but is in fact much more like the resumption of a bear, and at best a larger sideways volatile regime.

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5. Aggregate large spec positioning on a 3yr percentile basis remains quite long, especially considering the price action over the past few weeks. Large and small spec positioning in the SPX is at its 100th 6-month percentile and large specs are also at the 100th 6-month percentile in small-caps as well.

This is not what bottoms look like.

The counterpoint to this is the Dow where specs are crowded short.

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6. There are some positive developments though. The other week we got the buy signal in the BofA B&B indicator and we’re nearing a buy signal in our NAAIM oscillator. 

This week and next should be very telling in general on whether we’re seeing a major change of trend or if this dip too will be bought. I’m increasingly thinking it’s the former. But, as always, price is king and we will play the tape as it unfolds.

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7. High nominal growth born from fiscal excesses has greatly delayed the lagging impact of monetary policy. It has also raised the level of tightening needed to bring about a cooling of the labor force that’s needed to lower wage growth, ultimately nixing the driver of persistent inflation.

But the leads we track continue to suggest we’re getting closer to realizing more of these lagged impacts (charts via BofA).

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8. The DXY continues to be an impressive chart and we continue to be long it across a number of pairs.

The fact that all the USD bears have been able to bring to bear on the market after a monster 11-week consecutive bull bar run, is a sideways consolidation, is good sign that bulls remain in strong control.

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9. What’s been driving this rally is obviously yields, with both the 2yr and 10yr spreads (weighted appropriately against DXY basket) in the 100th percentile. While nominal spec positioning remains quite muted (red = large specs).

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10. We will be looking to add to our USDMXN long this week, either at this pullback reversal or on a close above the recent level of resistance.

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11. Gold continues to be the market that most has my interest. If it can hold these levels and close the move above the key 2,000 level it’ll give a strong indication that a new major bull leg is getting underway.

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12. And we’re seeing exactly what you want to see at the start of a major trend resumption, which is pervasive apathy.

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