Jeff Cooper: It's Hard to Imagine the S&P 500 and the Dow Remaining at Their Highs
Weakness in momentum stocks and the dollar will likely burden the larger indices.
The major intermediate higher low off the March 2009 bottom occurred 31 months later in the first week of October 2011. The significance of that intermediate low was defined by a large-range outside up month in October 2011.
Monthly S&P 500 Chart From March 2009 to Present:
From the first week of October 2011 to the first week of May 2014 is also 31 months.
Tom DeMark of DeMark Analytics pointed out yesterday that the bottoming pattern at the August to October low was roughly 60 days.
From the early March peak to early May 2014 is also 60 days.
S&P 500 Daily Chart From 2011:
S&P 500 Daily Chart for 2014:
Arguably, an idealized "overthrow" high could have played out had the S&P 500 (INDEXSP:.INX) spiked over 1900, mirroring the undercut in October 2011 of the August 2011 initial low. However, as geometric as the market is, it's not a fine Swiss watch.
The above daily chart for 2014 shows that the S&P has carved out what looks like TWO smaller false breakouts and overthrows above the March high. The first occurred on April 4, precipitating a dramatic reversal. The second played out last Friday (May 2). It looks like a Test of a Test failure pattern may be in the works. In other words, April was a test failure of the important March cycle high, and May could be a test of that test. For the bears, the second mouse (the second false breakout) may get the cheese .
Why? Because Tuesday (May 6) left a small break below a near-term trend line (A). Downside follow-through below both the 50-day moving average and this trend line threatens accelerated momentum.
The S&P had every chance to follow through to the upside on Tuesday (May 6) after Monday's (May 5) reversal off the 50 DMA, but it failed to do so. Now the onus is on the bulls, especially as the NASDAQ 100 (INDEXNASDAQ:NDX) seems to be rolling over from a perfected square-out at around 3610 in this time frame. Follow-through suggests that the NDX has built a right shoulder.
If a head-and-shoulders top is triggered in the NDX on a break of around 3400, the projection is down to around 3100. I can't imagine this scenario playing out without the S&P and the Dow Jones Industrial Average (INDEXDJX:.DJI) playing big-time catch-up.
I often say that speculation is observation, pure and experiential, and that thinking isn't necessary and often gets in the way.
Twitter (NYSE:TWTR) is a good example of what I mean. Everyone knew about Twitter's big lockup expiration yesterday. The assumption was that Twitter has been heavily shorted at least from the upper $40s -- if not higher -- by hedge funds, which would use the supply from the lockup to cover. A "no-brainer," right?
Twitter Daily Chart:
Moreover, Twitter showed the third to fourth decline to the bottom of the lower rail of a channel, which often ties to support. Three to four moves down (or up) often characterize completions of some degree. Additionally, Twitter had declined to horizontal support.
Be that as it may, despite the above considerations, the obvious thing was the right thing: that TWTR would come under pressure from the lockup.
The intense pressure surprised most participants who "overthought" the situation -- including myself.
Yesterday's action underscores the premise that speculation is observation and that thinking can just get in the way. It also underscores the concept that stocks walk before they run and run before they gallop into exhaustion.
Yesterday [subscription required], I walked through the significance of $37 and $31 for Twitter, identified by the Square of 9 Chart. When Twitter snapped $37 with authority, the stage was set for potential climactic action to $31.
Twitter Square of 9 Chart:
Click to enlarge
10-Min. Twitter Chart for Monday and Tuesday:
Note the volume spike on its debut and the THREE-bar surge that defined the exhaustion top, as well as yesterday's volume spike. While $31 is an idealized projection being 540 degrees -- or a true square or cube (90 degrees x 6 "sides") -- down from the closing $73 high, one must wait for Twitter to PROVE the geometry. It will be interesting to see how Twitter closes out the week, but with the entire tone in the NASDAQ Composite (INDEXNASDAQ:.IXIC) reflecting intense selling, caution is particularly advised on stepping into the Twitter blood on the street on the thesis that another Facebook (NASDAQ:FB) flush-out opportunity is playing out. It may be a long-term buying opportunity, but with story stocks in turmoil, defense is warranted. The plains are littered with the bodies of heroes.
Twitter exemplifies that support is a bull market phenomena, whether that be traditional linear technical support, such as trend lines and channels, or logarithmic, "two-dimensional support" as defined by the Square of 9 Chart.
Yesterday morning's report [subscription required] walked though the idea that Wynn Resorts (NASDAQ:WYNN) should be a good tell for the direction of the market for the balance of the week.
Daily Wynn Resorts Chart From Yesterday's Report:
Wynn Resorts Square of 9 Chart From Yesterday's Report:
Click to enlarge
On Tuesday, Wynn Resorts reversed following another test of the key $218 level and accelerated to the downside following a break of little triple bottoms (Rule of 4 Sell).
10-Min. Wynn Resorts Chart:
Chipotle Mexican Grill (NYSE:CMG) is another former "untouchable" that has taken it on the chin. Chipotle is flirting with another break of its 200 DMA. Downside follow-through implies potential to around $340.
Daily Chipotle Chart:
Tesla (NASDAQ:TSLA) has held up better than many names. However, yesterday's action suggests that it may kick into overdrive on the downside. Monday may have marked a false breakout. Tesla looks like it has reversed from a third attempt to reclaim its 50 DMA, with Tuesday leaving an outside down session. Yesterday's signal reversal bar may perpetuate a Triangle Pendulum sell signal on follow-through below a rising trend line for 2014.
Daily Tesla Chart:
Apple (NASDAQ:AAPL) may also be ready to fall. Apple left what looked like bearish Train Tracks on Tuesday, reversing from a high of $604. The Square of 9 Wheel shows that $604 is roughly one rung down or one square down of 360 degrees below Apple's all-time $705 high.
Click to enlarge
Conclusion: With former leaders, story stocks, and high-flying momentum names getting killed across the board, it's hard to imagine the S&P and the Dow holding highs. It's also hard to imagine money managers, who own beat-up darlings, not selling some of their bluer-chip big caps. That may have started in earnest this week following a long distribution process.
The conspicuous weakness in the dollar since Friday mirrors the sell-offs in the S&P on Friday and Tuesday.
Daily Dollar Index Chart for 2014:
Below 79 puts the dollar in a weak position. Below 78, it looks like a dollar crisis.
Weekly Dollar Index Chart From 2011 to Present:
Whatever the reason for the dollar plunge, the correlated weakness in US stock indices has the whiff of panic. Someone, somewhere wants out.
If you're interested in purchasing a physical Time & Price Calculator (Square of 9 Wheel), which includes a consultation revealing what Jeff Cooper has learned about how to use it over the last 25 years, contact him at email@example.com
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter