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Apples and Oranges: How Safe Is a Market Tied to the Back of One Wild Horse?

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Where is the S&P 500 heading from here, post-Apple earnings?

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Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and nightly day and swing trading picks, click here.

MINYANVILLE ORIGINAL

Get your cannonball, now to take me down the line
My bag is sinking low and I do believe it's time
To get back to miss Fanny, you know she's the only one
Who sent me here, with her regards for everyone

--"The Weight" (The Band)

I'm not smart. I try to observe. Millions saw the apple fall but Newton was the one who asked 'why.'
-Bernard Baruch

Yesterday in the Daily Market Report (subscription required), we suggested a rally attempt should begin, and although the indices were green throughout the day, it was tricky on the long side with many of this year's Momentum Mohicans getting scalped.

Names include Lululemon (LULU), which failed after backtesting its 20-day moving average, leaving multiple short-term sell signals including an Expansion Pivot below its 50 dma, a 180, and an LRO (or large-range outside-down day). Note that yesterday's high and failure in Lululemon was defined by a turn-up in the Daily Swing Chart.



Ulta Salon (ULTA) collapsed following a Hook, Line & Sinker sell set-up that played out following last Thursday's reversal signal bar. Last Thursday, Ulta left a large-range outside-down reversal bar, hooked up on Friday, "lined down," and stayed down following a gap on Monday, setting up the sinker for Tuesday.

Note that Thursday's distribution day on Ulta was a test failure following the Key Reversal sellday from April 16. The market (and stocks) often (but not always) give a graceful exit. Last Thursday's reversal in Ulta was such a graceful exit.



Herbalife (HLF) melted down yesterday after leaving an impressive looking outside-up reversal to a new closing high on Monday. Many players were likely loaded for bull, having carried Herbalife home long on Monday's breakout. When Herbalife didn't follow through, and then ticked below Monday's low, it triggered what I call a 'Kaiser Soze,' or a Reversal of a Reversal.

In other words, Monday was an outside UP reversal day, and when Monday's low was violated, it indicated a reversal of Monday's reversal. The takeaway is that false signals (Monday's bar) are oftentimes more powerful than true signals. Such was the case with Herbalife on Tuesday.



The first sign of weakness in Herbalife on Tuesday was an ORB (an Opening Range Breakdown). Herbalife tried to hold the 71 breakout pivot from last week, but accelerated on trade below the morning low. A late-day waterfall ensued when no bids showed up until Herbalife tested its 50 dma at 68.



A green day in the futes and indices masked the carnage in the 'Clouds' -- names like Salesforce.com (CRM), VMware (VMW), Rackspace (RAX), F5 Networks, and Citrix Systems (CTXS) all rained on the bulls' parade with last week's spikes to new 52 week highs in the above names now looking like Buying Climaxes.







The SKYY (the cloud computing index) was literally falling, with the ETF showing two breakaway gaps in the last two weeks, and it is now trading with authority below its 50 dma. A Head & Shoulders topping pattern projects to 19, the prior highs from last October/November.



Symbolically, Tuesday's collapse in Buffalo Wild Wings (BWLD) looked like Chicken Little had showed up as the SKYY was falling.



From a technical perspective, only if the little ascending wedge or Bear Flag on the S&P (from April 10 to April 17) is regained does it open the prospect for a genuine leg up.



The top of this Bear Flag ties to the overhead 20 dma now at 1388, a test of which has not fully been satisfied on rally attempts so far. This also correlates to a 50% retrace of the decline from 1422 to 1357.

I would be cautious about the possibility of a 'Pinocchio' just above the 20 dma that noses just above 1390 for example, grabbing stops, followed by a quick reversal.

A break through the upside of this Bear Flag followed by a quick break to the downside will trigger a Triangle Pendulum sell signal, indicating that the S&P has been trading sideways within the mid-point of a bigger correction which will take the index down to around 1330, or even 1300.

A successful recapture of 1400, especially on the Friday weekly closing basis, opens the possibility for a run to the 1440 to 1460 range. With the S&P showing a number of closes below its 50 dma in the last two weeks, I'll believe a new leg up is playing out when I see it.

Most stocks topped out one to three weeks ago, and many topped out six weeks ago. So, we're at the point where a rally must start soon or the implication is a bigger break is ahead.

Any bigger break from here may be more than part of a bullish correction. A bigger break may imply that the decennial cycles mentioned in this space in the last two months that were due to top in March were exerting their bearish influence.

A bigger break may mean that the 100 year cycle from 1892, shown in this space in December projecting a late March/early April high may be taking hold.

Interestingly, the Dow Jones Industrial Average topped out in 1892 at 37, with 360 cycles of 37 giving 13,327.

The DJIA's high so far this year occurred on April 2 at 13,297.


Click to enlarge

Looking at the decennial cycles, there was a strong rally from the fall of 2001 into March 2002, followed by a waterfall decline. So the recent high may have been the high for the year, indicating caution.

World War II began on September 1, 1939, 10 years after the all-time DJIA high on September 3, 1929.

Happenstance? The decennial cycle is too powerful to be ignored.



Conclusion

As offered yesterday, a rally attempt was due following a test of the prior lows in keeping with the strong seasonal April month-end markup. If the S&P can hold above 50% of the last up leg (50% of the little Bear Flag), which equates to 1375, it is theoretically in a stronger position. The strategy is not to be too long unless the S&P remains above 1375, and especially 1370, which ties to last year's high.

Above 1390 and a 50% retrace of the decline off the early-April high puts the market in a stronger position, but the question is, can Apple (AAPL) really open the window for a move above 1400 S&P? Can Apple pave the way and carry the entire market? How safe is a market that is strapped to the back of one wild horse?

After a strong run in any stock, the normal expectation is a return rally. Double that for Apple. The big question technically is, even if a significant high is in for Apple, whether the 644 high is a 'head' or a 'left shoulder' with the possibility of a nominal new high to follow. Did the three little drives up in Apple to 621 in March define a 'left shoulder'?



Apple tested our 556 target successfully twice prior to reporting after the bell and exploded 50 points. You had to be there and no, I was not. It was probably worth the risk given that Apple had satisfied a possible downside projection between 547-556 given that the stock had already been smashed into earnings and is/was entitled to a return rally even in the most bearish of cases. But that is woulda, coulda, shoulda.

You puts up your money and you takes your chances.

Now it will be interesting to see the action on a test of 619, which is 90 degrees down from the high.

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No positions in stocks mentioned.

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