Will the S&P 500's Flirtation With 1,400 Be Rejected?

By Jeffrey Cooper  MAR 16, 2012 9:30 AM

Can the S&P 500 break through 1,400 and hit new all-time highs? Or is it breaking down?


Don’t lean on me man, cause you can’t afford the ticket…
Ohhh, wham bam thank you maam
"Suffragette City" (David Bowie)

I generally avoid temptation unless I can’t resist it.
-- Mae West

It’s clear now. We are either very close to a top on the S&P 500 (^GSPC) here near 1,407, on an extension to 1,440-ish, OR we get 1,600 this year.

Click to enlarge

That being said, the nature of any correction, which should play out between here and perhaps as high as 1,440, will tell the tale of the tape.

In other words, if a correction does indeed show up from a March high, it could be a bullish shallow correction, a deep correction of as much as 5% to 10%, or the start of something more pernicious.

I think a correction of more than 10% from this general level goes against the case for 1,600.

The bears need a break with authority below the prior major high of 1,370 (May 2011) to get something going. Anything shy of that paves the way to 1,440, and above that, suggests a new all-time high as shown in yesterday’s monthly S&P chart:

A normal expansion above 1,440 could see a new high toward 1,600, which is what you get when connecting prior highs on the monthly chart.

While the breakout over 1,370 looks impressive, it has not scored a 90% upside day… yet. Moreover, remember that the market has had a nasty habit of creating whiplash in the last 12 years.

The October 2002 low was an undercut of the July 2002 climactic low. The October 2007 top was an overthrow of the primary top in July 2007. Likewise, the July 2009 flush-out low was an undercut of the November 2008 crash low when the Nasdaq (^IXIC), the global indices, and many key stocks like IBM (IBM) made their lows. Major trend reversals occurred from these false new lows and highs.

No one ever got virgins to the top of a volcano by telling them they were going to be thrown in.

Given the pattern of three drives to a high on the monthlies in the S&P, the confluence of some long cycles, coupled with sentiment more bullish than that seen at the October 2007 all-time high, we must guard against complacency just because the idea of 1,600 on the S&P is being adopted faster than kids by Angelina and Brad.

The S&P bottomed on November 21, 2008 at 741. It only spent a few weeks below 741 on its way to bottoming in March 2009 at 666. The range of the undercut was 75 points.

What is interesting is that a similar 75-point overthrow of the May 2011 top at 1,370 gives 1,445.

Wouldn’t it be interesting if the S&P spent no more than a few weeks above 1,370 on its way to 1,440/1,445 on a test of the May 2008 pre-crash pivot high?

It may be nothing, but I think it would be an interesting vibration indeed if the S&P tagged 1,440 after a Fibonacci 144 months from the March 2000 Bubble Top.

This is part of the reasoning as to why I believe the window between 1,407 and 1,440 is critical. Above 1,440, the S&P could arguably be on a trajectory to a new all-time high.

Either way, whether the S&P is contained between here and 1,440, or drives to a new high satisfying a Megaphone Top on an all-time high, it looks like a "pay me now or pay me later" trade for the bears. Cyclically and pattern wise, it looks like there is unfinished business in a continuing secular bear market. If the bear market mirrors the length of the preceding secular bull market of 18 years, there is time to run out as far as 2018.

As for Apple (AAPL), yesterday we noted that March 14 tied to $591. Apple closed near $591 on Wednesday, gapped up to $600, and reversed to close under $591.

Yesterday’s reversal was a "Wham Bam Thank You Ma'am" sell: following two large-range gainers on gaps, the third gap attracted sellers.

Moreover, the market often plays out in threes, and Apple now shows three drives to a possible interim high. Trade back through the red dashed line on the chart, which connects the prior two highs this year, suggests a pullback to the green rising trendline which coincides with the rising 20 day moving average. The bulls will probably buy such a pullback hard. If this scenario plays out, it will be the nature of that rally attempt that will tell us much about how deep and long a Fruit Loop to the downside will play out.

The potential turning point for equities in March is also seen in gold/(GLD). We are seven months from the all-time high in gold, and as you know, the seventh bar oftentimes sees a reversal.

Sentiment toward gold amongst technicals on the tube has become conspicuously bearish, while the weeklies show what may be an Inverse Head & Shoulders (bullish). The potential pattern is being carve out as GLD tests its 50 week moving average, and a rising trendline connecting the 2008 low with the late December 2011 low. This coincides with the lower rail of a parallel channel off all the tops since 2009.

Turning to the dailies, GLD shows a breakout in January over a declining trendline and its 50 and 200 day moving averages. The current decline may be a constructive A B C pullback. Note there is potentially more room to play out for what could be a picture perfect backtest near 155 GLD.

Recapturing the Bowtie of its 50/200 dmas puts GLD back in a strong position.

Offsetting 170 suggests that a run to new highs is in the works.

Conclusion. Yesterday was 1396 calendar days from the big May 19, 2008 top. Yesterday, the e-mini S&P futures closed at 1,396. This time/price squareout has been respected by the market every time for the last two years. While 1,407 and 1,444 are viable objectives, the market is vastly overbought and sentiment is at record bullish levels, and rather than a genuine breakout, this week may have simply been an options-expiration squeeze.

Strategy. A one-time move that pulls back to 1,372 can be bought (backtest of breakout), but trade below 1,370 with authority looks very bearish from this point on.

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No positions in stocks mentioned.

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