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Jeff Cooper: When the Generals Are Sold into Quarter-End, Something's Wrong


Biotech broke down and it feels like something's up.

Many leading glamours and generals took gas yesterday as the SPX erased the lion's share of Monday's big spike. It's been a bear market in follow through, nothing new about that.

But Tuesday's selloff had the whiff of liquidation. The selling in biotech generals like Celgene (CELG)  and Amgen (AMGN), which had recently set new highs, leaves a sour taste on the tape.

Who needs to get glamours like this off their books at the end of the quarter?

It feels like something's up.

It's as if there is some big smart money that is concerned about liquidity and is concerned that there's not enough room for willing and unwilling sellers to exit at the same time... i.e, the start of the 2nd quarter.

Perhaps players want to beat their competition to the punch after the first down first quarter (albeit marginally so) in a few years.

Perhaps players want to lighten up rather than take another quarter of Mr. Toad's Wild Ride.

Yes, I realize CELG may have been down on issues regarding patent news in Europe. But it is also on the verge of triggering a Rule of 4 Sell---a break of triple bottoms traced out over 2 months.

And the selling wasn't just relegated to CELG.

IBB itself sold off strongly from a Minus One/Plus Two Sell setup left on Monday.

After falling sharply from a reversal from our 370ish/March 20th time/price square-out,(see here) IBB bounced after testing its 50 day line.

However, trade with authority through the 50 day will snap a 4 month trendline.

Other generals retreated on Tuesday. Downside follow-through in Apple Inc. (AAPL) will snap little double-bottoms at its 50 day line.

An hourly SPY from the February 25 high shows the SPY is flirting with offsetting Monday's gap, leaving March lows vulnerable.

If the March bottoms break,  triple bottoms in January loom large. Those triple bottoms tie to the 200 day moving average.

With downside follow-through, the SPY is in a potentially very weak position having closed back below its 50 dma.

It is subject to a trap door cascade pattern with the above March lows giving way to the January lows and the 200 dma.

Notable is the series of lower highs on the SPY since its February 25 low.

In fact, the hourly SPY has carved out a possible continuation Head & Shoulders.

The neckline is around 205 which, if broken, projects a move to below 200.

Remember, the SPX Quarterly Swing Chart shown last week indicates caution is warranted on trade below 2000 (200 SPY).

Interestingly, the current pattern ties directly to the pattern from 1987.

That was 28 years ago. A cycle of contraction.

In 1987, the market topped on August 25. There was huge one day wonder rally in early October 1987 around an eclipse.

Monday saw a very sharp rally and an eclipse occured this weekend.

Forecasting a crash is a fool's errand; however, it is important to remember that crashes come not from too much bullishness but from too much complacency.

There is a lot of complacency out there.

The thinking seems to be that there is no need to be concerned about liquidity because... the Fed has our collective back?

There seems to be a consensus that there will be a catalyst before a major decline can start.

What if there is no trigger that's a harbinger for a major selloff and the only tell is a technical tell with the market falling of its own weight triggering a trap door sell setup on a gap such as the one described above?

Conclusion. The SPX has been riding a monthly trendline since 2011 but recent highs may have carved out a bearish backtest subsequent to the October break.

I can't help but wonder if a waterfall event won't play out this month that sees the SPX test last October's lows around 1820 as the SPX enters the window 180 degrees in time from last October's waterfall decline.

Interestingly, a test of the October lows satisfies around a 10% decline.

Of course, most market participants have been fed the line that we haven't had a 10% correction in years so that if a serious selloff begins, it will be 'normal'.

However, the SPX decline into the October low was 9.9% and qualifies in my book.

So what if the October decline was just a shot over the bow of the USS Complacency?

What if we are on the cusp of something more than a garden variety 10% decline? A toxic cocktail of complexity, velocity and lack of liquidity as offered in this space last week is about to be shaken, not stirred.

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Twitter: @JeffCooperLive

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No positions in stocks mentioned.

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