Dow and S&P Flirting With Pre-Crash Levels

By Jeffrey Cooper  FEB 23, 2012 8:50 AM

The major indices are hovering near pre-crash levels for 2008. Could the market be topping out?


And as I watch you leaving me
You pack my peace of mind

- "No Expectations" (Rolling Stones)

Let’s assume for a moment that market corrections have not been repealed.

Let’s assume that reversion to the mean has not morphed 2011’s Year of Living Volatility into a monolithic straight-line advance in 2012.

Let’s assume that the normal expectation would be for a meaningful pullback to occur after the Dow Jones Industrial Average (^DJI) has satisfied a walk back to 13,000 for the first time in four years.

Let’s assume that the normal expectation would be for a meaningful pullback to occur after the S&P has tested last year's 1370 high. After all, didn’t this advance emanate from last year’s virtual test of the summer lows of one year prior in 2010?

So, in addition to all the time/price harmonics we’ve walked through in the last weeks implying at least a reaction (forgetting about the fact that all but a few people on the planet are looking for anything other than a mild selloff of 5 to 6% at most from here), the DJIA and S&P 500 (^GSPC) are flirting with pre-crash levels from 2008.

In fact, the persistent advance from December 19 mimics the runup from March to May 2008, when oil was spiking the way it is today. Then, most on the Street assumed the financial crisis of the day (housing) was behind us after Bear Stearns went belly up -- like Greece today.

Let’s assume corrections are still normal even though we may believe that inordinate amounts of Central Bank Pixie Dust ordinates have been exploded underneath the financial markets.

Clearly, all the King’s Men and all the King’s Horsepower did not prevent the swift sell-offs in 2010 and 2011.

So why is it that most market participants assume that any correction from here will be mild?

That being said, let’s walk through the history of Dow declines of 5% or more from 1900 through 2011:

Five percent declines occurred about three times a year.

Ten percent declines occurred about once a year.

Twenty percent declines occurred about once every three and a half years.

(Source: Capital Research and Management Co)

With two waterfall declines (2010 and 2011) occurring within the context of the powerful rebound off the 2009 lows, it is curious that the popular consensus is for the next correction to be mild.

But, it is wise not to underestimate the ability of persistency in the market to be extrapolated into the hereafter by those talking their book.

Let’s take a look at the last major swing in the S&P off its December 19 pivot low at 1202.36.

It is possible to count a clear 5-wave pattern which oftentimes indicates completion of some sort.

In addition, the S&P is flirting with a break of a rising 3-point trendline up from December 19.

A 50% retrace of the last substantial swing from the January 30 low at 1,300 is 1,334, which ties to the major 1,333 pivot (2X the 666/667 low). Ninety degrees off this week's high is 1331.

So this is an important level to watch.

A 50% retrace of the entire swing from December 19 is 1285, which is 180 degrees down in price from this weeks high (again assuming that a high of sorts has played out).

This equates with a band of potential support that ties to an approximately 5% to 6% correction.

This would be a normal expectation since on average, three 5% corrections occur every year.

The big question of course is, as the longer this market stretches higher and shrugs off the normal expectation for a 5% pullback, does it become less resilient, suggesting something more pernicious?

Gold (GLD) is following through from our buy setup on the metals last week, and is flirting with turning up the important Quarterly Swing Chart.

This will occur on trade above the fourth-quarter high since GLD made a swing low at the end of December.

The behavior following this turn up on trade above 175.46 will be important. The normal expectation if GLD is bullish, and the big correction since last summer was simply a bullish correction on the way to new highs, would be for a mild reaction in time and price following a turn up of the quarterly.

Note that this week's upthrust in the metals occurred roughly 180 days from the primary high on August 22. That suggests that the price action in early March will be critical as this will be 180 days from last year’s September 6 all-time high.

Note the natural time harmonics of 60 days, 120 days, and 180 days that have been unfolding in GLD:

1. From the September 6 high, the November pivot high occurred roughly 60 days later.

2. From the August 22 high, the low for the move in late December was roughly 120 days later.

So, the first week in March is pivotal for metals and equities as it is the third anniversary of the March 2009 low.

If you think that anniversaries in the market are meaningless, it is worth considering that the May 2011 high occurred near the third anniversary of the May 2008 pre-crash pivot high, and that the kickoff for the current rally occurred near the third anniversary of the November 21, 2008 crash low.

Conclusion. It looks like a correction is starting . The primary target is probably a test/undercut of the 1300 level. I would put the odds that a high for the year is here at about 50/50.

However, I doubt that most money managers will be inclined to dump stocks promiscuously prior to the end of the first quarter and will instead circle the wagons to protect the baby going into the end of March, and the 12th anniversary of the Bubble Top on March 24, 2000.

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No positions in stocks mentioned.

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