The Next Few Weeks May Confirm the Second Phase of the Crisis
The market may be heading back to the 2008/2009 lows.
Through the circle of fast and slow
I know it can't stop
--"Have You Ever Seen The Rain?" (John Fogerty)
In yesterday's report (subscription required), Richard Russell was quoted:
In almost every rally since World War 2, the market was strong on the fourth day of the rally.
So far, the market has failed to deliver a strong fourth day in a rally.
The market has also failed to deliver a follow-through day on a substantial increase in range and volume between the fourth and seventh day off the low.
Monday's 'news reversal' on the Spanish rescue saw the futes fizzle even before the opening bell. In fact, the high tick for the session was the opening tick.
The nail in Monday's reversal, when weakness turned into a late route, was hammered in as Apple (AAPL) crumbled nine points.
We've all seen 'sell the news' tapes unravel before, but Monday's was particularly nasty and abrupt as it didn't even have the decency to put up a first-hour rally head-fake high.
So, it was not at all surprising that Tuesday's pop-up opening was faded. As you know, up opens following large-range distribution days are seldom the stuff of upside reversals. So Tuesday's up open saw the indices go red, testing Monday's low. What was intriguing was the ensuing rally.
However, we should never forget that we're dealing with Memento Market, one that has shown no memory from one day to the next for the past three weeks.
The key to Tuesday morning's low and subsequent rally may be the turndown in the important 3-Day Chart. W.D. Gann considered this to be one of his most important tools for swing trading.
So let's walk through the pattern of the 3-Day Chart since the May 1 pivot high.
1. On May 4, the 3-Day Chart turned down directly following the May 1 high. Bearishly, the turndown saw the S&P 500 (^GSPC) extend coincident with an authoritative break of the 50 dma. Taken together, these signals were the sign of the bear confirming what my cycle analysis had led me to forecast since February, namely that the market was set to turn down hard from a spring high, which I believed would likely be the high for the year.
2. On May 29, the 3-Day Chart turned up for the first time since the high was made. The normal expectation following a persistent decline would be that a turn up of the 3-Day Chart would define a high. It did. From the May 29 high, the S&P plunged to a new low for the move. That new low satisfied a test/undercut of the 200 dma and a 360-degree decline (at 1275) from the high of the year.
3. Note the extension on Friday, June 1 as the 3-Day Chart turned back down, leaving a bearish close below the 200 dma on the important Friday weekly closing basis. If the market were going to wash out or crash in that time frame, that was an ideal opportunity to do so. But, we are no more living in an era of free markets than we are of free market economies. They can tap on the brakes but can they prevent the train from ultimately coming off the tracks and derailing? Can the powers that be prevent the cycles from exerting their downside influence? Can politicians and bankers really prevent the bear from fulfilling its nature in due course? These are the same politicians who have paralyzed much of the planet like a Debt In the Headlights, and the same bankers who leveraged the world into the greatest crisis and downturn since the Great Depression. Yes, I am certain these are the same folks on double-secret probation that can prevent the bear from completely manifesting itself. The thing is these folks are not totally untalented -- they know how to buy everything under the sun, including time. They also know how to Bend It Like Beckham, as in kicking the can down the road like David Beckham.
4. Despite every opportunity to do so, the market did not crash on Monday, June 4: the analogue of 1987, which produced a Black Monday following a decisive close below the 200 day after a pernicious decline in the S&P, failed to materialize. That does not mean a plunge into the end of the second quarter will not play out. However, note the large-range gainer that recaptured the 200 day-moving average with authority just two sessions after it caved. The very next trading day, June 7, the 3-Day Chart turned up once again. Once again, the turnup defined a high. That high at/near 1329 was tested on Monday's spike open.
5. There are three important observations to make since Monday's high. First, the 3-Day chart turned back down by the most nominal of margins on Tuesday as the S&P traced out three consecutive lower daily lows. Second, theoretically, this current turn down in the 3-Day Chart may have defined a right shoulder of an Inverse Head & Shoulders pattern. Third, since the end of May, one could make the argument that an Up, Down, Up, Down Sequence has been traced out on the 3-Day Chart, which looking back will have defined a significant low. Moreover, note that the S&P is perched on a breakout above a closing 3 point trendline/neckline. Follow-through will be key: offsetting Monday's high will leave a potentially bullish Reversal of a Reversal (or what I refer to as a Kaiser Soze).
Will there be any resolution to this Inverse Head & Shoulders pattern prior to this weekend's Greek election that could launch 1,000 offers?
It seems that a breakout over the neckline easily projects to a test of the overhead 50 dma and a stab-up to the key 1370 level. The tension is on the tape as a successful move out of this Inverse Head & Shoulders clearly suggests a probe of the Monthly Swing Pivot at 1357/1358. This is where the Monthly Swing Chart turned down in May and where a Dow Theory Bear Market Sell signal was issued. That signal is a harbinger for a resumption of the bear market, implying a multi-year decline.
It seems typically ironic and perverse of Mr. Market to set up the hope of a bullish Inverse Head & Shoulders pattern at the important 200 dma just before the crucial Greek election, under the specter of an Italian Job. No one knows how that election is going to go or how the market will react to it any more than there was a lock on fade away trade on the Spanish Rescue on Monday. However, if the dynamics of Greek politics offer any clue, should we be surprised to see the outcome of the Greek election call for Germany to leave the EU? Anything goes at Club Med? Life is like a box of olives, Forest. Sometimes you get the pit, sometimes it 'gets stuffed.'
Feelin' lucky before the weekend, punk? You puts up your money, you takes your chances. Time is more important than price and time analysis suggests that even in a bullish resolution, there is no interim low in place until the end of June/beginning of July. The third quarter begins next month which coincides with 90 degrees from this year's high. It is also the anniversary of many important turning points in the last five years.
The idea of a turning point at the end of the month is also the takeaway from an interesting chart that buddy Jonathan Stephens sent me yesterday.
Click to enlarge
However, it is important to note that June 19 (just after the Greek elections) is the beginning of the Gann Panic Zone (counting from the lower pivot May 1 high) which would last into the end of the month.
Fast moves oftentimes are derived from false patterns. If market participants are going to be disabused, the hard way of the idea of a bullish Inverse Head & Shoulders, it would occur on a break of the low of the right shoulder, i.e., Tuesday's low. Such a break could coincide with a second break of the 200 dma. Oftentimes, a first signal such as the break of the 200 dma on June 1 is squeezed prior to a second confirming signal, or as I like to say: The first mouse gets the squeeze, the second mouse gets the cheese.
If a 'failure' of the Head & Shoulders is going to occur, a 'Blade Runner' if you will, through the right shoulder, will likely occur before the end of June. If a 'failure' is going to play out, leading to a swift washout, it may not offer a graceful exit. It may occur on an outsized gap. If such a washout is going to occur, the pattern suggests that the current consolidation may be the mid-point of the leg down, implying around 1200 on the S&P.
After a 36-month (six squared months) rally off the March 2009 low, that played out with three drives to test the 1420 pre-crash pivot from May 2008, where the S&P turned down with authority -- the third consecutive May to pull the plug on the market, but hey, who's counting and who says anniversary dates mean anything?
Is it possible that the confluence of cycles we've been pointing to since February has more significance than just a correction? Is it possible that the market is headed back to a test of the 2008 or 2009 low? Is it possible that the stage is set for a greater Great Depression?
What bothers me is that it seems that most everybody is sharpening their pencils on when and what to buy. These are some smart folks who you don't want to dismiss out of hand.
Yet it is interesting and disturbing that the 'guru' that called for the mother of all bull markets back in the late 1970d/early 1980s, Robert Prechter, has been calling for the mother of all bear markets. And, the thing is, he's been calling for this for some time, so that the great majority on the Street see him as the boy that cried wolf one too many times.
The market has a perverse way of creating these kind of enigmas, but it gives me a more than a queasy feeling when one of the best and the brightest seems so cavalierly, complacently ignored.
I can't help but wonder that if a 'Blade Runner' pattern, destroying the notion of a bullish Inverse Head & Shoulders, is going to play out, it will be the confirmation of Crisis 2.0, the second phase of the crisis. And as offered above, such a break may not accommodate with a graceful exit: It may be on a large gap.
The following paragraph from The Week puts this potential for the second phase of the crisis in perspective.
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical.
The US, Europe and China all appear to be slipping into an economic slowdown together, said Hilsenrath and Mitchell in The Wall Street Journal. Last week, new data showed that American businesses are scaling back planned orders for durable goods like computers, aircraft and machinery, while in Europe, concerns about the Continent's ongoing fiscal problems are sapping business confidence. China's factories registered their seventh straight month of declining activity, and emerging economies like India, South Africa and Brazil are reporting new signs of weakness. Economic activity appears to be slowing around the globe. Europe's troubles remain the biggest single threat in the global economy, said Don Lee and Henry Chu in the LA Times, but lackluster US growth and inflation concerns in developing economies also pose serious risks. As a result, economists expect global growth to slow sharply this year, with world trade rising at just half of last year's pace. Countries like Brazil and India won't be able to pick up the slack, since their economies are smarting from Europe's dwindling demand for goods. And analysts worry that China, now growing at its slowest rate in 13 years, could be heading for a hard landing 'that would ricochet around the world.
The behavior of the market from here into the first week of July will be critical.
While there is hope amongst market participants, that it will be Weekend At Bennies once again with another dose of voodoo stimulants, the most bearish action would be the Fed triggering a Kitchen Sink-Hail Mary-Bazooka and the market failing to rally. Like the Spanish rescue, on steroids.
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