Jeff Cooper: Will S&P Drop to 1,900 After Yesterday's Reversal?
A break below 1,937 implies a top of some degree in the index.
The number seven is the basis of time, and a panic occurs and depression in the stock market every seven years, which is extreme and greater than the three-year decline. Seven times seven is fatal which makes 49 years and causes extreme fluctuations in the 49th to 50th year.
-- W.D. Gann
2014 is seven years from the 2007 top, which was seven years from the 2000 top. 2015 will be 49 years from the secular bull market top and the bear year of 1966, the high of a secular bull market that ran from 1949. In 1966, the Dow Jones Industrial Average (INDEXDJX:.DJI) declined from 995 to 744, a 25% sell-off, which played out in seven months.
2015 will be 7x7 years from 1966. If a bear market is indicated, it should set up with a first break in 2014 -- just as the top in 2000 set up the waterfall decline in 2001 and just as the 2007 top set up the waterfall decline in 2008.
Interestingly, Monday (June 23) was the 49th trading day (7x7) from the April low. Following two N/R 7 Days on Friday (June 20) and Monday (June 23), which imply an expansion in volatility within days, the market turned down hard yesterday. In the process, the S&P 500 (INDEXSP:.INX) carved out a Key Reversal day from a record high. Why? Because it made a new intraday high above Monday's (June 23) high but closed below Monday's (June 23) low. The record S&P high on April 4 was also a Key Reversal Day. It perpetuated a six- to seven-day decline of 80 S&P points, which saw an undercut the 50-day moving average. The market is near a natural 90 calendar days from the early April high, just as the early April high was around 90 days from the early January peak. So, the presumption is a turning point is due. If the S&P overbalances by declining more than seven days and/or 80 points (the prior swing), it will be an indication of a change in trend to some degree.
Daily S&P 500 Chart:
Yesterday, the S&P knifed convincingly through the prior swing high below which downside acceleration could play out precipitating a drive to 1,920 or the 50 DMA near 1,900.
Today is 1,937 calendar days from the 2009 low, so a break below 1,937 implies a top of some degree. Technically, an uptrend is "allowed" to violate one prior important swing high, but a violation of a second prior important swing high back indicates a change in trend -- two steps and stumble, so to speak. When walking up a staircase, one may misstep one step back and regain his or her composure, but losing two steps typically causes one to lose his or her balance. Yesterday, the S&P violated the prior June pivot high. The second swing high back is the important 1,900 early April peak, which ties to the 50 DMA.
Moreover, yesterday, the S&P satisfied a long outstanding upper window of a 1,959 to 1,965 projection. That projection is based on 1,965 aligning and vibrating with March 6, the 2009 low, and being nine revs, or squares, of 360 degrees plus a 90-dgree overthrow up from the 666 bear market low in 2009. In my experience, when the market is rejected violently, as it was yesterday, after hitting a price or time harmonic, it usually means the market is talking.
Monday morning's Daily Market Report [subscription required] showed the daily S&P 500 chart below, which suggested that a break back below the upper rail of the rising wedge would be a bearish indication.
Daily S&P 500 Chart From Yesterday's Daily Market Report:
Yesterday's stab convincingly through the prior swing high stopped just above a trendline connecting the April and June lows, below which downside acceleration could play out. My thinking yesterday was that following the breakout in early June, there was a textbook backtest of the breakout point. From there, the market should be in gear while a subsequent failure below the upper rail will indicate a change in character -- a bearish change in character.
Follow-through is key, and with the index verging on a breakout failure, downside follow-through on Wednesday could see a sharp acceleration as profit taking makes the rounds. With players sniffing out quarter-end, window undressing is about to trump quarter-end markup.
Of course, only the mannequins, i.e., the robots, know for sure.
That said, the best-performing group, the oil and energy stocks, were clobbered yesterday, suggesting that things could get ugly today and that the bloom is off the window-dressing rose.
Long-time readers of the Daily Market Report will recall that many times, going into quarter-end, a big institution will drive up many of its favorite and largest positions in order to force other funds to chase these titles and then promiscuously hit bids days before quarter-end, blindsiding the competition and causing their relative performance to suffer. This is a misdirection play, if you will. Clearly, someone big pulled the plug on the energy stocks yesterday, just as someone big circled the wagons on one of the worst-performing groups, the gold miners, last week, squeezing the shorts. All fun and games in front of the mid-year bell? Or is this something more pernicious?
The behavior from the first week of July should offer an important clue. Remember that July 4 vibrates off 1,576, the S&P high in 2007.
Additionally, July 1, 2010 was the major higher low from the March 2009 low. The first week of July 2014 is a Fibonacci 1440 days and degrees from the first week of July 2010. Theoretically, if the market declines sharply over the next few days, followed by a snapback retracement in the first week or so of July, perhaps that will represent an important higher low -- a fractal mirror of the higher low in 2010.
Will yesterday's Key Reversal Day precipitate another 80-or-so-point decline as it did from the April 4 Key Reversal Day? Following the plug being pulled on April 4, the next session saw another 20-point give-back. A 10-minute S&P 500 chart for Monday (June 23) and yesterday shows how the plug was pulled following a kiss of 19,65. The S&P tried to stabilize at 1,959, the lower window of my projection, but once 1,959 buckled, a late-day plunge played out.
10-minute S&P 500 Chart:
Yesterday, on Turnaround Tuesday, the market faked right and went left. With the market shrugging off every excuse to sell, yesterday morning's ORB (Opening Range Breakout) probably underscored the notion of a ramp to 2,000 S&P for quarter end for the vast majority of players. However, a Reverse ORB late in the session perpetuated a Measured Move sell-off into the bell (with 1,959 acting as the mid-point). One year ago, an important low played out on June 24, so it is possible a low-to-high cycle is exerting its influence. Trade below 1,937, as offered above, suggests a test of 1,900 and may indicate a more important high is in place if the 1,959 - 1,960 level cannot be recovered.
Up openings following strong distribution days and sell days are typically not the stuff of bona fide reversals, while a sharp down open today could generate a squeeze up to as high as 1,959. The Weekly Swing Chart would turn down this week on trade below last week's low of 1,930.91, which also ties to the number of days from the March 2009 low. The behavior on a possible turn down of the weekly chart around the end and beginning of a new quarter will be important to observe.
Form Reading Section:
Ligand Pharmaceutical (NASDAQ:LGND) Chart:
Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) Chart:
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