Jeff Cooper: Have the Bears Given Up Too Soon?
It's the moment of truth for the major market indices.
Back in January (it seems a long time ago now), when stocks were falling out of bed, the popular consensus was that IF a low was playing out, there would be a test of the low -- probably subsequent to a back test of the overhead 50-or-20-day moving average on the benchmark S&P 500 (INDEXSP:.INX). However, the preponderance of pundits' calls were for lower lows before any good low.
The Square of 9 did a good job of identifying February 3-4 as a turning point on the S&P 500. To recap, early February was 90 degrees square the 1850 peak, and the range of the decline squared out on February 3-4. I did not expect a vertical snapback.
The preferred scenario was a test of the low. Why? The January and February S&P decline carved out the sharpest undercut of its 50 DMA in over a year.
The decline caused the 50-day to flatten out and turn down, albeit marginally so.
S&P 500 Daily Chart From November 2012 With Its 50 DMA:
The presumption is that when price rebounds to a flat or a declining 50 DMA, it will define resistance. If the title is then going to reclaim the 50-day, there is a greater than average likelihood that it will require a test of the low to play out first.
When the test does not play out and when the 50-day is recaptured in short order, a squeeze can develop. Shorts rush to cover as the popular indices recover widely-watched metrics, such as the 50 DMA (you've got to draw a line in the sand somewhere), while dyed-in-the-wool bulls, who lightened up in the selling squall, rush to scramble back into the fray.
Be that as it may, one man's squeeze is another man's potential top.
The preferred pattern was a retest of the low before moving higher -- if, indeed, we were going to move higher. The alternate scenario was that the S&P would make a nominal new high before reversing and satisfying a retest of the low (a larger A-B-C correction).
The 50 DMA was one of the "Seven Samurai of Resistance" (see here) that the S&P knifed through, well, like sushi.
Now, the 50 DMA is rising somewhat. So, the caveat is that if a "V" Bottom was installed in early February, a rising 50-day moving average, albeit marginally so, could act as support.
The big question is whether the S&P carved out another "V" Bottom. There seems to be an urban myth that 2013 was a year of "V" Bottoms.
Checking the above daily S&P chart shows that there actually were tests of each correction since the major November 2012 low.
The correction into the June weekly closing low of 1592.43 saw a retest and higher low in late August at 1627.47. Note that the retest followed a nominal new high by the index in late July and early August first.
Since the correction into late August developed from a new high, arguably, one could label it as a new correction. That is not the way I look at it, but either way, in that case, clearly the sell-off into late August was followed by a retest of the low. The late August weekly closing low was 1632.97. A retest occurred in October with the S&P pulling back to 1646.47. Note that, once again, the retest and higher low followed a nominal new high.
The S&P has not yet satisfied a nominal new high while the Nasdaq-100 (INDEXNASDAQ:NDX) has. So it's a mixed picture. Either way, a retest of some kind, be it a higher low or an undercut, seems likely, even within the context of a continuing bull market.
The 50 DMA, currently around 1812 and closely coinciding with our old friend 1807, (which is 90 degrees down from high) seems to be the line in the sand for either a full-blown retest or a substantially higher low.
That said, as evidenced on the above chart, the retests in 2013 saw undercuts of the S&P 50 DMA.
Yesterday's Daily Market Report, we showed a daily S&P chart that flagged a possible Megaphone Top formation (see it here again). Is it possible a Megaphone Top on the dailies will be a fractal of a 13-year Megaphone on the monthlies?
What is interesting is that the upper channel of this possible Megaphone Top ties to a level that we first identified last year: 1866-1877 as a potential major square-out. Why? This is because 1877 is straight across and opposite March 6, the low in 2009. Time points to price; price points to time.
However, at the same time, as noted in yesterday's Daily Market Report, 1841-1843 is 90 degrees square February 14-18. The S&P clearly knew that level yesterday as it flat-lined, leaving a narrow-range bar in the spirit of an N/R 7 Day (Narrow Range 7 Day). Such contractions typically are followed by an expansion in volatility. Given the vertical march-up since the early February spike, a pullback seems reasonable. Will those who bought the big dip, sell the big rip?
So, the question is if the S&P is in runaway mode to a date with destiny in satisfying a Megaphone Top at a nominal new high around 1866-1877, will we get a multi-day pullback first?
While several glamours galloped to new highs on the market's recent February rebound, the Dow Jones Industrial Average (INDEXDJX:.DJI) and the Dow Jones Transportation Average (INDEXDJX:DJT) tell a different story.
While the S&P reclaimed its 50 DMA with authority, the Dow and the Transports show what look like bearish Pinocchioes of their respective 50 DMAs.
Daily Dow Jones Industrial Average Chart for 2014 With Its 50 DMA:
Daily Transports Chart:
The above Dow Jones Industrial Average charts shows an N/R 7 Day on a back test of the 50 DMA. The presumption is a pullback. Moreover, it looks like a back test of a declining 50 DMA.
The Transportation Average reversed convincingly on Tuesday after a close over its 50 DMA on Friday. Was the Transportation Average's reclaim of its 50-day on the important Friday weekly closing basis a fake-out? Downside acceleration implies that a wave 3 decline of some degree is possible, which would theoretically be sharper than the January decline with the Transportation Average targeting its 200 DMA.
Now that "The Analogue from 1929" has been publicly flogged and eviscerated, as a friend of mine so succinctly put it, has the last bear gone home at exactly the wrong time?
Actually, despite the recent rip higher, the analog is still alive. The S&P and the Dow still show lower highs right at the point in the pattern where a rollover plays out. What if the rollover accelerates and turns into a snowball from hell?
As offered in yesterday's Daily Market Report, there have been 13 bull markets since 1929. Only one of them was longer than 5 years. We are coming up on 5 years. Feelin' lucky?
Maybe something, maybe nothing but...
The Tulip Mania peaked in Holland 377 years ago on February 5. On the Square of 9 Chart, 377 is straight across and opposite February 19. I'm just sayin'.
Click to enlarge
Form Reading Section:
SolarCity (NASDAQ:SCTY) Chart:
Tesla (NASDAQ:TSLA) Charts:
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