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Jeff Cooper: A New High on the S&P 500 Is Likely a False Breakout


Even if the market heads higher, it is wise not to chase it.

This article originally appeared on Jeff Cooper's Daily Market Report. To get Jeff's commentary plus day and swing trading ideas each day, take a FREE 14-day trial to Jeff Cooper's Daily Market Report.

I think the Fed is inflating the third and greatest bubble yet of this century.

-- David Stockman

The S&P 500 (INDEXSP:.INX) has been acting as if it's on a different planet than the Nasdaq Composite (INDEXNASDAQ:.IXIC).

In some ways, of course, it is.

I hear many bullish explanations such as the economy is obviously recovering, but prior to that, investors were willing to pay up for growth. Now that recovery is appearing, investors are rotating into the more cyclical, economic, and industrial names. Really?

The trouble is that yesterday's (April 30) GDP number showed no such signs of recovery -- just more excuses, like the weather.

Another explanation of the disconnect between the S&P and the Dow Jones Industrial Average (INDEXDJX:DJI), and the Nasdaq 100 (INDEXNASDAQ:NDX) and the Russell 2000 (INDEXRUSSELL:RUT), is that fund managers and money managers are hiding out in the larger-cap, more defensive names.

Another is that the Federal Reserve may be buying S&P futures as national security and wartime defense measures. Is the Fed trying to counteract a foreign entity that it surmises may react to some economic sanctions?

I deal in pattern analysis, not explanations. Yesterday, Jason Goepfert noted that the last two times the S&P closed at a 52-week high while the RUT was 7% below its own high were September 25, 2006, and March 21, 2000.

March 21, 2000, is an interesting date. It was the vernal equinox and three days before a major high in the S&P and the Nasdaq Composite. The Dow had double-topped two months prior in January 2000, having tested its August 1999 peak.

I have a different pattern now with the S&P and the Dow at highs, while the NDX and the RUT have set their all-time highs two months prior. Is this a mirror-image foldback, with March 2000 being a Fibonacci 168 months from March 2014?

Yesterday, the Dow set a new all-time closing high, and the S&P broke out above a little declining trend line from the April pivot high.

S&P Daily Chart:

In recent reports [subscription required], I've flagged the idea of a rally into the first week of May, surmising if that it played out, the S&P could set a new high near 1,920.

The above daily S&P chart shows that a multimonth Broadening Top formation would be satisfied on such a rally, with the upper rail of the formation being tested.

Why early May? An important low played out in the first week of February. The first week of May will be 90 degrees in time later. Often, the markets pivot on these natural 90- and 180-degree divisions of the year. Note that the early April reversal in the S&P was 90 degrees from the early January pattern high.

So, a possible low-to-high-to-high-to-high cycle could see the first week of May define another high.

Importantly, 180 degrees from the major October 9, 2013, low was April 9, 2014.

As often is the case with the talented Mr. Market's perversity, his intentions aren't conspicuous. This year, a major reversal occurred from April 4, while at the same time a significant low occurred on April 15. So, the idealized April 9 time frame (180 degrees from low) splits the difference. A big high and a big low were found a week on either side of April 9.

As you know, there were several reasons to look for a rally of some degree to play out from Monday (April 28). On Monday, the Gann Panic Window closed on the NDX and the RUT (counting from the March 6 peak). This is a period of seven to eight weeks from the high when, historically, many waterfall declines of various amplitudes have climaxed. Many leading stocks such as Workday (NYSE:WDAY), highlighted in this space at the time [subscription required] as buy candidates, were severely extended to the downside on Monday after putting in three to four large-range consecutive decliners and satisfying the Rule of 3 ( three large-range bars in a climax run, for example).

In addition, the NDX left a large-range Bottoming Tail on Monday (April 28) from a test of the high of the low bar day (April 15), as many leading names were experiencing a third or fourth runaway downside day.

Daily NDX Chart From March to Present:

So, Monday's reversal set up a plausible attempt for a reaction rally, fueling a move in the relative strength of the S&P and of the Dow to probable new highs.

What's interesting about the idea of a new high in the S&P is that, in addition to satisfying a possible bearish Broadening Top formation, a move to 1,921 will precisely satisfy nine squares, or rungs, up from the 666 low in March of 2009.

It is worth noting that the 1,576 S&P high in 2007 was precisely six rungs, or squares, up from the 768 low in 2002.

Since three rungs up from 666 is 1,011, which was the major higher low on July 1, 2010, I don't think this harmonic frequency is happenstance.

The market seems to want to go higher, and there is a better-than-average likelihood that the S&P will be magnetized to 1,920ish. If so, I think there are good reasons to believe it's a false breakout.

Interestingly, the July 1, 2010, low was perpetuated by the Flash Crash on May 6, 2010. So, the first week of May 2014 will be a Fibonacci fractal 1,440 degrees in time from the famous Flash Crash.

The first week of May is 90 degrees square the 1,646 S&P October 2013 low. It's also 90 degrees square the 1,894 record high. A run-up into the first week of May, be it to above 1,900 or from another failed breakout attempt, should define an important turning point.

Conclusion: Just prior to the March high in the NDX and the RUT, I noted that April was 618 months from the Cuban Missile Crisis in October 1962. This is the last time tensions flared between the US and Russia. Perhaps discounting the crisis, the market crashed in early May 1962 and then again in the midst of the crisis six months later.

So, this March was 617 months from the Cuban Missile Crisis. On the Square of 9 Chart, 617 is 90 degrees square March 6 (the low in 2009) and aligns with 666 and 1921.

Click to enlarge

I can't help but wonder if a false breakout in the S&P here would harmonize with the false breakout in January 1973 prior to a two-year slow-motion crash. The year 1973 was seven years following a major secular peak in the markets, and just as the popular consensus was that a recovery was under way. It was not. Here we are, seven years from the significant 2007 peak. The popular consensus is that a recovery is well in place. The year 1973 was 41 years ago. On the Square of 9 Chart, 41 aligns with March 6 and is square both 666 and 1,921.

Click to enlarge

I would not chase the market if the S&P is magnetized toward 1921. It may be a false breakout like 1973. It may define the beginning of the end of the third bubble this century. As you know, in the first quarter, the S&P satisfied a 14-year Broadening Top formation. I can't help but wonder if a false breakout to a new high will define a smaller fractal three-month Broadening Top. A pattern within a pattern often implies a cycle is prepared to exert its influence.

Form Reading Section:

10-Minute Greenbrier Companies (NYSE:GBX) Chart:

10-Minute Weibo (NASDAQ:WB) Chart:

10-Minute Isis Pharmaceuticals (NASDAQ:ISIS) Chart:

Twitter: @JeffCooperLive

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No positions in stocks mentioned.

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