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Jeff Cooper: Did Yesterday Mark a Market Top?


History indicates that the S&P 500 may fall below the 2009 lows.

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They say that no one rings a bell at the top, but Tuesday's "change in behavior" may have been just that. The specific change in behavior has to do with the history of Mondays and Tuesdays in 2014. A friend sent me the following report yesterday:

Emerging market equities have fallen every Monday in 2014. iShares MSCI Emerging Markets (NYSEARCA:EEM) was down a cumulative 11% for 2014 on the first day of the week and then recovered to be down 5.5% year to date. Is that the impact of weekend Chinese news and press or some other emerging market issues? So, the EM sneezes and we follow. The S&P (INDEXSP:.INX) is down 75% on Mondays in 2014 with a cumulative return of -4.6%. Tuesday's have rallied 88% of days for a 6% gain in 2014.

Did the urban legend of Turnaround Tuesday's bullish complexion bite the dust yesterday?

This wouldn't have been a bull market for the ages if it hadn't had many who've been around for more than a few cycles eating crow -- yours truly included.

The major difference between market watchers who have been around for several cycles is that the bearish among them didn't think the market made a lot of sense in the last few years while other money managers may have believed the same thing but were smart enough to ride the market despite its disparity with the economy -- or they were forced to do so by performance considerations. Money managers don't get paid to be market timers. Their mandate is to be invested for the most part, most of the time. I specifically say money managers as opposed to the public because up until recent months, retail has not been playing the market directly. They may be in the market by virtue of investments in mutual funds, but reports show that only in recent months has there been a substantial increase in active trading in retail accounts.

A friend of mine was speaking with a brilliant money manager last week and commented how the current bull market didn't make a lot of sense (particularly when compared to past bull markets). The money manager's response was priceless. He said, "Was it supposed to?"

What is interesting to me is that one smart technician I know, who has been bearish for some time, continued to say last week that this party wouldn't end well, but he added the twist that, "We aren't there yet."

That's often typical of what you see at tops; the grizzliest of bears don't throw in the towel, but say, "We're not there yet." They stop saying, "The top is here."

Few of those letter writers who are still intellectually bearish will tell you what they really think as they are not interested in another dinner of financial crow and humble pie.

I have been wrong in the past, like all those who wrestle with Mr. Market. But, the important thing to remember is that there is a conspicuous distinction between being intellectually bearish and being opportunistic on the long side with short-term trading. As noted above, the normal expectation is that no one, from the most respected market watchers to the Johnny-come-lately gunslingers, are immune from being tarnished by the bulls' ridicule as they rage through rationality toward their date in Matador City.

I have never been one to pull punches, and, right or wrong, you get my unblemished perspective in this space.

So, as for the market, I think you can put a fork in it.

If indeed, the dinner bell is ringing, what kind of bear meal will be served is a matter of speculation. What it means for downside probabilities is something that we must look to the market for on a week-by-week basis. But as you know, as we've walked through, the presumption is a doozy of a sell-off if not a new bear market. What can be said without equivocating is that everything we look at points to risk running high.

The big picture indicates the possibility of a third leg down within the context of a 13-year Broadening or Megaphone Top formation. Theoretically, that implies lows below the March 2009 low. It's hard to believe, but who thought the S&P would crater from 1576 to 666 in 17 months? This big picture of three drives, or legs, to a low was the pattern at the 1974 bear market bottom. Is there a third shakeout in a secular bear market in front of us?

A third leg down could see a decline hold between 740 and 1100 S&P to carve out a major inverse right shoulder.

On the S&P, 740 ties to the 2002 bear market low (768) and the November 2008 crash low (741). The market has a memory -- a memory that saw the S&P crash in 2008 test the low of six years earlier. A decline to 1100 would satisfy a complete retrace of the run-up from October 2011. Complete retracements of parabolic runs is not atypical.

Click to enlarge

So, in hindsight, the move off the 2009 low had the benefit of a double bottom spread over seven years (2002 to 2009). Here we are seven years from high. Is a top playing out seven years from high? Remarkably, last week's S&P high is 300 points above the 2007 peak with 300 being straight across and opposite March 6! What are the odds? Time points to price; price points to time. Range squares out with time.

Interestingly, the 2002 bear market low at 768 is straight across and opposite December 31, the date of what may have been an initial peak in the S&P in 2013, with a nominal new high a few months later. The Dow Jones Industrial Average (INDEXDJX:.DJI) topped at the end of December and has failed to score a new high. This rhymes with the pattern from 2000 when the Dow topped in January and the S&P and the Nasdaq Composite (INDEXNASDAQ:.IXIX) went on to top in March. It also rhymes with the pattern of a primary high in the S&P in July 2007 and a nominal new high a few months later in October.

It is interesting that 741, the S&P November 21, 2008 crash low is opposite the last week of March. Notable is that 741 also aligns with the first week of October, which has been a powerful vibration since the 2002 low.

If you find reasons alleviating, there are two big ones that backstop the notion of a possible deluge if the market starts down in earnest:

1. Developed countries central banks are "all in." They "can't" let the markets fail, and I think the algos and many money managers have been keying off that. Consequently, if and when the markets do turn down, it could be huge. It may take an outside catalyst like war or things could just topple under their own weight like a child's building blocks.

2. A serious turndown in the markets and the economy will find the Fed shooting blanks. If a serious downturn plays out, the notion of a defanged Fed could elicit panicky conditions.

Yesterday, we used a SPDR S&P 500 ETF Trust (NYSEARCA:SPY) chart, which showed hourly Train Tracks suggesting the market was vulnerable.

Hourly SPY Chart:

The vulnerability was underscored by the face-plants in many highfliers on Friday and Monday.

On Tuesday, selling became more intense in many of these titles.

Names include the two glimmer twins: Tesla (NASDAQ:TSLA), the bulls' darling, and Facebook (NASDAQ:FB), the bulls' goat-to hero icon.

Tesla is approaching its 20 DMA and Gap window. The high close on the high day February 26 was a time-and-price square-out as noted in this space [subscription required] as 253 is 90 degrees square February 26 on the Square of 9 Chart. Additionally, 253 is straight across and opposite mid-November and 119ish, which was also a square-out low identified in this space at that time.

Click to enlarge

From the mid-November low, 222 was 720 degrees up in price (two revs of 360 degrees). Since 253 is 180 degrees up from 222, it means that 253 satisfied a move of 900 degrees on a closing basis -- a good place to look for a reaction.

Tesla Chart:

Facebook left a Gilligan sell signal on Monday in addition to leaving a Key Reversal Day.

A Gilligan sell is a gap up to a new 60-day high with a close at or near session lows.

Facebook closed below the prior day's low after setting a new 52-week high, satisfying a Key Reversal Day.

The indication by the price action of these two darlings of the bulls is that Tuesday's sell-off, while not big in terms of the indices, reveals a loss of animal spirits and a chink in the armor.

This goes hand in- hand with our thinking last week as to the air coming out of the biotechs when I wrote, If the Biotech Generals Turn Tail, Expect the Troops to Follow [subscription required].

The esteemed Art Cashin quoted something from Jason Goepfert yesterday morning that I think is notable:

After closing at a 52-week high four days ago, the S&P 500 is higher now than it was then, but breadth on average over the past four days has been negative. This has occurred at almost all major peaks since 1940. When this worked by identifying a market peak, it happened almost immediately, with stocks beginning their decline with little to no further upside in the days following.

Moreover, a friend sent me the Russell 2000 (INDEXRUSSELL:RUT) chart below. The RUT shows five straight days of underperformance versus the SPY. Additionally, the pattern shapes up as a possible Gann "M A Top."

So, let's turn to the RUT.

Bearishly, on Tuesday, the RUT knifed below last Tuesday's spike, suggesting that there was a buying climax or short squeeze. On Tuesday, the RUT closed below a rising trend line from the February low. Trade below last Tuesday's low will turn the Weekly Swing Chart back down. If that occurs, it will leave a weekly Reversal of a Reversal sell signal (A Kaiser Soze sell).

Daily RUT Chart:

As contemplated, last week's new spike high on the RUT may be a mirror image of the pattern low in October 2011 when the RUT (and the S&P) undercut an initial low in August, flushing out longs prior to reversing sharply higher. October was a major higher low for the bull run off the March 2009 lows. Did the RUT and S&P just carve out a major overthrow of their January peaks? As above, so below?

Click to enlarge

Since the October 2011 low was 30 to 31 months from the March 2009 low, I can't help but wonder whether another trough will be seen 30 to 31 months from October 2011, which ties to April and May 2014.


Last week, we flagged that 1213 (RUT) was 90 degrees square March 6. On March 4, the RUT set a record high at 1212.80. As long-time readers recall, this 90-degree time-and-price square-out is the same relationship at the major 2007 top and the 2009 low. The 2007 top at 1576 was 90 degrees square the first week of October. The 2009 low at 666 was 90 degrees square March 6. Was last week's drive to 1213 by the RUT another historic square-out? If so, remarkably, it is occurring on the 60-month anniversary of the low. At the same time, 1877-1878 is 180 degrees opposite the date of March 6. On March 6 and 7, the S&P set record closing highs of 1877 and 1878. Happenstance? When two major indices square-out in tandem, the odds are that a powerful turning point is playing out.

Click to enlarge

Form Reading Section:

VMware (NYSE:VMW) Chart:

zulily (NASDAQ:ZU) Chart:

Twitter: @JeffCooperLive
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