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Jeff Cooper: What if Mr. Market Pulls a Mark Twain?


As the famous humorist supposedly said, "History doesn't repeat, but it often rhymes."

History doesn't repeat itself, but it does rhyme.
-Mark Twain

was Day 7 from the February 3 closing low at 1741.89. As you know, reversals often times occur on the seventh hour, day, week, month, and year -- be it a bullish pullback or a new leg down.

Yesterday, the S&P 500 (INDEXSP:.INX) left an innocent little Topping Tail. We're about to get to see just how innocent the "tail" was.

Sometimes the most powerful turns are not so conspicuous, with no alarms ringing and no flags flying. Such was the case with Amazon (NASDAQ:AMZN) on January 22 when it left a stealth Gilligan sell signal from an all-time high. A Gilligan sell signal occurs when a stock (or index) gaps up to a new 60-day high and closes poorly on the session.

Amazon Chart:

Not all major highs are created equal:

1. Amazon's reversal coincided with a square-out at 408. (See here.)

2. The January 22 signal day followed a third drive higher -- this is often a topping pattern. Indeed, Amazon had carved out a little Broadening Top prior to breaking down.

Notable is the pattern in Amazon when it snapped its 50 DMA followed by a seemingly strong recovery of the 50 DMA. The recapture of its 50 DMA proved to be a fake-out. Follow through is key. The next day, January 31, Amazon gapped lower, closing on session lows.

Amazon's action at month end left a Hook, Line, and Sinker sell signal. Amazon hooked up (back above its 50 DMA) inspiring confidence in players that a bullish undercut of the 50 DMA had played out. Then, Amazon "lined down" in a breakaway gap back below its 50 DMA. The next day, Amazon sank another 20 points. The Hook, Line, and Sinker setup did a good job of defining a good short play -- next-day delivery, so to speak.

I can't help but wonder if Amazon is a template for the S&P here. For example, the S&P shows a conspicuous break below its 50 DMA, followed by the index reclaiming its 50 DMA on Tuesday.

Daily S&P Chart for 2014 with its 50 DMA:

Click to enlarge

The vast majority of players are now looking for new S&P highs in concert with the new high set on the NASDAQ-100 (INDEXNASDAQ:NDX) on Tuesday.

Many astute market watchers who were bearish capitulated on Tuesday. In addition to the S&P recapturing a magnificent 7 levels of tight resistance from 1800 to 1810, which was elaborated on in this space, those long of stock were quick to call Tuesday's 1.1% move a Follow Through Day, an all-clear sign. The line in the sand is drawn between 1800 and 1810. What if the market pulls an Amazon and knifes back below "magnificent resistance," which SHOULD turn into support? Fast moves come from failed moves. I can't help but wonder with so many pooh-poohing The Analogue from 1929 whether a hook down here back below the 50 DMA can actually instigate a deluge of selling. Many are chuckling about the overlay to 1929, but is it a nervous laugh? To wit, many may be talking about it, but how many are acting on it with puts or hedges? Could a decisive failure back below the 50 DMA be a catalyst for a swoon in the major indices a la Amazon?

I am not so sanguine about the notions that its business as usual and that risk in owning stocks has evaporated based on 1-day's action and a new high in the NASDAQ-100.

To wit, as flagged in yesterday's report, in making a new high, the NASDAQ-100 may have satisfied a Megaphone Top.

Below is the NASDAQ-100 chart from yesterday's Daily Market Report.

The S&P narrowly missed carving out an outside down month in January by avoiding a decline below December's low. That was saved for February. Be that as it may, the S&P did leave potentially bearish Train Tracks on its monthlies in January.

S&P Monthly Chart from January 2013 to Present:

Click to enlarge

January's close near the low of the month virtually assured the Monthly Swing Chart would turn down. It did so with a resounding flourish on the first trading day of February. As W.D. Gann noted, many turning points occur at the beginning and at the end of the month and at the beginning and at the end of the quarter. Moreover, when a big wheel of time such as the monthly turns, the normal expectation is for a reaction in the opposite direction to play out. We got a doozy. I think the takeaway is that the longer the move without a turn down in the monthlies, the greater the reaction. Prior to the early February turndown below January's low, the last turndown occurred in June. Importantly, the recent turndown followed a 7-month period.

Obviously, the turn down of the Monthly Swing Chart in June 2013 defined an important low. The important thing to understand is that trade back below the February low, the "circled" monthly swing low, in short order, would issue a Time Turn Trend sell signal.

If this happens within the Gann Panic Window, which stretches from February 19 to March 9 (depending on whether you count from the SPX December 31 peak or the January 15 peak), the market is vulnerable to a waterfall event. This is the same 55-day window from the high that defined the crashes in both 1929 and 1987.

Yesterday we sent a note, "The Mother of All Self Fulfilling Prophecies?" (See here.)

While analogues are made to be broken, what if Mr. Market pulls a Mark Twain, and we get the mother of all rhymes?

Despite the overlay going viral and, allegedly, lessening the chances that a repeat will play out, what no one is talking about is the 80-year cycle.

The mid-point of this 80-year-or-so cycle saw the worst turndown since the early 1930s. This was the 50% decline in the indices in 1973 and 1974 in tandem with a Great Recession.

1987 was a crash, but it was not a harmonic of this 80-year cycle.

It is possible that the 2008-2009 crash reflected the trough of the 80-year cycle; however, the major indices have potentially satisfied 3 drives to a high over 13 years within the context of a possible Megaphone Top.

13-year Megaphone Top Chart:

Going back 80 years from the 1930s ties to the Civil War. Eighty years prior to the Civil War ties to the Revolutionary War and the Declaration of Independence. Another cycle of 80 years back ties to the emergence of the Colonies.

Is it legitimate to count the 80-year cycle from the depth of the depression in 1933, which ties to a possible trough-to-peak move in 2013?

Be that as it may, a very smart friend of mine looks at it this way:

A cycle is not a comet. When everyone is genuinely bearish, you get the valuations associated with a real bear market. It is important to focus on the sequence of events in the cycle rather than a specific number of years.

In 2009, we never got the valuation levels associated with other major bear market lows. In the sequence from the 2000 top, we have not seen a third drive down such as occurred in the mid-point of the 80-year cycle when 3 drives down defined a valuation low and pattern low in late 1974.

Monthly Dow Jones Industrial Average (INDEXDJX:.DJI) Chart From 1966 Through 1974:

Click to enlarge

It is possible the reason that we did not see those values associated with a depression cycle bottom in 2009 is the Fed programs. Is it possible the Fed skewed the cycle, which may lead to a greater debacle? Instead of allowing the bear market to run its course and cleanse the market and the economy, is it possible the great student of the Great Depression has set the stage for a further debacle?

Twitter: @JeffCooperLive

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Positions in SPY and SPXS

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