Why a Rally for the S&P 500 Looks Unlikely Here
In-depth technical analysis shows there is a low probability of a significant market bounce during this tumultuous period.
Got nowhere to run to baby
Nowhere to hide
-- "Nowhere to Run" (Martha and the Vandellas)
In 1987, the high day for the S&P 500 (^GSPC) was August 25. Following a decline, a lower pivot high played out roughly 40 days later.
A crash began 49 (7 squared) calendar days later with Black Monday, October 19, occurring 55 days from the high.
(NOTE: This chart was created in 2010)
The same pattern and time frame played out in the Crash of 1929.
Last year I showed the following chart of 1929 with possible downside projections for 2011:
Click to enlarge
The 49 to 55 day so-called Gann Death Zone from the peak on May 2, 2011 ended in late June 2011. The S&P did not crash in June. Rather, it walked down into late June. And instead, a right shoulder was carved out in early July and a waterfall decline played out into early August, roughly 90 degrees in time from the early May peak.
In 2010, an early May top did see the market crash into the 55 day "Death Zone" ending in late June/early July.
But let's revisit the pattern from 1987 since it is half the 50-year cycle from 1962, which also saw a spring high and a crash in May.
Some may think that the market will carve out a low here in May and spike up into August like 1987. I'm not so sure. In any event, only recapturing the 50 DMA (day moving average) on the S&P would suggest this outcome is remotely possible.
In 1987, there was a solar eclipse on September 23 (29 days after the high).
There was a lunar eclipse on October 7 (43 days after the high).
The lunar eclipse was near the last pivot high just prior to the landslide.
If market conditions are ripe, solar and lunar eclipses are believed by some to exacerbate volatility.
The 29th day after this year's April 2 high was May 1, the new solo high in the Dow Jones Industrial Average (^DJI), unconfirmed by other indices.
The 43rd day from this year's April 2 high is May 15.
So, 40 days and 40 nights to around 43 days from April 2 gives May 12 to May 15. If this same "crash pattern" is operative this year, the last rally potential should occur in that window from May 12 to 15.
As noted in yesterday's Daily Market Report, assuming April 2 remains the high throughout May (something that is becoming more likely with each day that passes), the Gann Death Zone begins on May 12, around 40 days and 40 nights of "wandering" following a high.
Counting from the October 19, 1987 crash day to May 12, 2012 is 8,972 days.
Dropping a decimal gives 897.
897 ties to May 12 on The Wheel.
Click to enlarge
In 1987, many high-flyers experienced Air Pocketism before the S&P/DJIA succumbed. This May, we've seen many high flyers and leading stocks led to the downside. The latest example was Tuesday's crash in Fossil (FOSL).
To continue the analogue from 1987, this year there is a solar eclipse on May 20 and a lunar eclipse on June 4.
Counting from April 2, the 55th "crash day" targets May 27, right between the intensity of the solar and lunar eclipses.
This year's May 20 has a G8 summit and a NATO meeting. May 20/21 is the 49th day from this year's high. For Gann, 7 was considered the number of change/panic, so 7 squared is considered explosive.
May 20, 2012 is something else as well. Apparently it is a significant Mayan date:
Checking a monthly chart from October 1987 to today shows that the crash in 2008 began when a trendline connecting the 1987 low to the 2002/2003 lows was snapped.
Click to enlarge
Note the flirtation with the trendline a few months before the ultimate waterfall in 2008.
Arguably, the beginning of the crash in 2008 coincided with a monthly Rule of 4 Break, a break of a 3-point trendline. Note that the crash phase in 2008 began on the SECOND break of the trendline... just as you've seen recently that several stocks crashed coincident with the second break of their 50 DMAs.
Since the 2009 low ,the DJIA has traced out 3 drives to a test of the low of the high bar month from October 2007.
The low of the high bar month in October 2007 was 13,407.
The early May high in 2012, the high for the move since 2009, was 13,339.
What is important to observe is the apparent breakout over a declining trendline from the 2007 top to the 2011 top. Arguably, a bullish backtest could be the scenario.
Also note the rising trendline connecting the 2009 low with the 2011 low. Clearly, the level just above 12,000 is big-picture pivotal.
Below around 12,000, DJIA suggests a move to at least well below 10,000 and the lower rail of a POSSIBLE channel of support. That is theoretical support -- there are no guarantees that the lower channel will hold. It is possible that the US market will catch up to other markets such as the Spanish market that has already violated its 2009 low.
The above chart of the IBEX is from a week ago. More damage has occurred.
The bearish view is that a 12-year topping process consisting of 3 drives is playing out in the DJIA, punctuated by a last leg up from 2009 itself comprising a possible 3 drives to a high.
Above we said that only a rally that sees the S&P recapture its 50 DMA implies the possibility that the market is in May of 2007 (with higher prices to follow) rather than May through October of 1962 when the market came under severe liquidation. In addition, only once we are past the first week of June and the Panic Zone for this period is past, is the idea of a bullish resolution and higher prices this year probable.
Any rally toward the 50 DMA in the S&P sets up as a solid shorting opportunity. The question is, will the market accommodate us with such a rally? The market doesn't owe us a rebound here. Despite being oversold on the hourlies and dailies, the most bearish thing a market can do is get oversold and stay oversold. The big picture patterns and big picture cycles suggest extreme caution is warranted.
Yesterday the S&P turned its monthly down and tailed back up through the prior lows, implying the possibility of a rally attempt.
However, any such attempt that backtests a Bowtie of the overhead 50/20 DMAs may coincide with a Minus One/Plus Two sell set up. This is because the 3-Day Chart is pointing down with 2 consecutive higher daily highs putting the S&P in "the position." Note that the overhead 50 also coincides with the level where the 3 Day Chart turned down.
Yesterday's low at 1347 occurred at precisely 180 degrees in price down from this year's 1422 high so a rally attempt MAY play out, but the important thing to remember is that rallies look made for the selling here and that overnight longs are risky with the market in this very vulnerable period.
Click to enlarge
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