Is the Jaw the Biggest Tool Left in the Fed's Box?
The market may be on the verge of forming a top.
I need love, love
To ease my mind…
No, love, love, don't come easy
But I keep on waiting
Anticipating for that soft voice
--"You Can't Hurry Love" (Holland)
Let's turn the clock back to Friday, June 1. The S&P 500 (^GSPC) had just closed below its 200 day moving average for the first time this year.
The normal expectation on the first kiss of the 200 dma is for a rally attempt to play out.
If it doesn't, duck, because the chances of a washout are good.
A bounce played out. But the important thing to observe was the behavior on the subsequent pullback following the first bounce. As we pointed out in this space at that time, the S&P could be tracing out an Up, Down, Up Down Sequence on its 3-Day Chart. As it happened, the next pullback after the first bounce turned the important 3-Day Chart back down on June 12.
Why? Because the S&P had traced out three consecutive lower daily lows. What's notable is how nominal the lower daily lows were into June 12. The three days going into June 12 traced out three lower lows, but barely so. The low on Monday June 11 was just slightly lower than the low on Friday June 8. Likewise, the low on Tuesday June 12 was only fractionally lower than the low on June 11.
In addition to the first kiss of the 200 dma in early June, the selloff from this year's April 2 high had also satisfied a 360-degree price decline at 1275.
Importantly, the S&P never closed below 1275 in early June.
Moreover, early June, 2012 was a natural harmonic count of 240 degrees in time from last year's October 4 low for the year.
While the market could have 'crashed' on Monday June 4, especially as the S&P had closed below its 200 dma on the important Friday weekly closing basis, the crash never showed up.
Gann students will note that the Gann 'Death Zone' of 49 to 55 days, counting from the April 2 high, culminated on May 27.
Arguably, if a crash were to have occurred it would have already done so.
That said, I suspected the market could be vulnerable to a turning point low 90 degrees from the high, which ties to the first week of July.
As I mentioned at the time, it is possible that following an intervening rally, the first week of July could carve out a W bottom, with a test of the early June low playing out in early July.
Just as we have a 30 day high-to-high cycle from April 2 to May 1 followed by a 30-day cycle low around June 1, July 1 shapes up as a turning point.
Will it be a high or a low?
Can the market be magnetized higher into quarter-end?
1. There is a lot less confidence about being short.
2. While the memories of May highs in 2010 and 2011 are staunch, so too are memories of waterfall summer lows in 2010 and 2011 and the near-V bottoms off those lows. The shorts don't want to get caught any further in a 'V Thrust' than they have on Monday and Tuesday when they put their money on the line with the outcome of the Greek election.
3. There is a lot of money that is pushing for strength into quarter-end and to some extent, that can become a self-fulfilling agenda. As my Dad used to say, "Stocks don't move, they are moved."
The short answer of course is that anything can happen and the mannequins very well may be dressed up into quarter-end, but with the S&P up a quick 90 points in a few weeks and testing its 50 dma, and quarter-end more than just a few days away, perhaps the idea of a higher trajectory into quarter-end may not be a smooth glide path with 10 days to burn.
Perhaps there will be a pullback first, now that there seems to be a chorus calling for new highs to shake the window dressers' conviction, followed by another drive higher. Such a pattern would satisfy the idea of 3 Drives to a High, a common pattern found at highs (and lows). Theoretically, on an idealized technical basis, a pullback would hold the prior little swing highs from May 29 and June 11 around 1334/1335.
In a nutshell, if the market rallies into early July and the S&P turns its Quarterly Swing Chart up, while the trend is still down the turn up should define a high soon in terms of both time and price.
The first week of July is a major 'vibration' as It is what is referred to as a Master Square in time and price. This is because the all-time 1576 S&P high in 2007 vectors/aligns with the date of July 4. Likewise, it is not insignificant that 1422, this year's high, is precisely 1 rev of 360 degrees below 1576. This ties to the pre-crash closing high in May 2008, which was roughly a Fibonacci 1440 degrees before this year's May pivot high.
Obviously, July 4 is also an important vibration for the US.
Consider for a moment that the largest financial crisis in 80 years started in July 2007, which is 231 years from July 4, 1776. On the Square of 9 Chart, 231 is 90 degrees or square of July 4. 90 degrees -- the blind-side.
Click to enlarge
Happenstance? Let's take a look at a few more examples of time and price vibration squaring out to become "one in the same."
From July 1776 to the heart of The Great Depression in the first week of July in 1932 when the Dow Jones Industrial Average scored its low at 42, is 156 years. On the Square of 9 Chart, 156 ties to a price of 42.
From July 1776 to 1937, when most all market participants thought the tremendous 5-year advance was the harbinger of a new bull market and better economic times, is 161 years.
161 is opposite early July on the Square of 9 Chart.
From 1776 to 2012 is 236 years. Interestingly, 236 ties to September 3, the all time pre-crash high in 1929, which is opposite the first week of March, the crash low in 2009.
The harmonics between these dates are compelling.
The question is whether a retracement rally is over or about to be over soon. The bigger question is whether a 3-year rally of 3 drives higher ended in April. If the answer to both questions is yes, the market is in an extremely vulnerable position, perhaps the most vulnerable position since 2007.
Fittingly and ironically, this would be occurring just as many institutions are loading up their portfolios for a short-term quarter-end markup. Will there be a graceful exit?
Ironically, this inflection point could be occurring just as the light at the end of the tunnel for a structural solution to the European Debt Crisis appears. I can't help but think: Is the light at the end of tunnel really a locomotive being driven by the can kicked down the road?
At the end of the day, neither risk not debt is derailed, they are passed on. Like hobos, eventually they hitch a ride on boxcars on the road to perdition.
Like the 5-year 1932 to 1937 cycle, this July also marks five years from the primary high in July 2007. It is important to remember that cycles can run low to high, low to low, high to high, or high to low, but in any event, the 5-year cycle is significant and it will be important to observe the behavior come July.
This July will also be the anniversary of the pivot high 1 year ago which began a waterfall decline. That was the right shoulder on the weekly S&P.
Will the current retracement also mark a right shoulder on the weeklies?
Interestingly, the first trade of the Euro occurred on January 4, 1999. January 4 is opposite July 4.
This July promises to be eventful and challenging.
Now that the Greek election is over, the spotlight should shift to Italy and Spain where borrowing costs have surged. Now that so much emotional energy was expended on the outcome of the Greek elections and a sigh of relief rally exhaled, the real issue is from where in the world will the money for Spain's bailout come?
The talk is that the money will come from the ESM, which technically doesn't exist yet since it's supposed to be ratified by July 2012.
Spain is supposedly going to be bailed out by an entity for which Spain is meant to contribute 12% of the funding, an entity that hasn't yet been ratified yet?
The chant of an European solution is rising. If it's a bear market, that mood will soon define a high.
The chant of the Fed providing more love for the market today is becoming shrill. Since when is it the role of the Fed to be the Planetary Put?
With expectations of largesse from the Fed running high, will the jaw prove to be the biggest tool left in the Fed's tool box?
Yesterday, I sent an alert noting that the S&P was backtesting its April Neckline at 1358. That Neckline is opposite 667, the 2009 S&P low. The may yet rise to test a second possible higher Neckline, but caution is warranted right here right now for a pullback that tests/undercuts the 50 dma.
A 10 minute SPY shows that a move below Tuesday's lows will trigger a little Rule of 4 Sell Signal which should see a test of 135 SPY.
Friday's big-cap reweightings loom and suggest the market should begin to top. Today's FOMC Cha Cha could be a doozy, especially if it is revealed that the Emperor has no clothes and the Jaw has no teeth. Despite a weakening economic picture, the Fed is unlikely to do anything other than offer cheap talk. I can't help but wonder if buy programs driven by the Fed lifted the market back up to current levels where they wouldn't have to 'act' and reveal real weakness. Perhaps the Fed is just as worried as some on the Street are that a dangerous point of recognition comes when the Fed acts but there's no applause.
Yesterday was the 49th day from the May 1 pivot high, where if a blood bath was going to play out into late June/early July, I think it would have begun, in keeping with the Gann 49-55 day so-called 'Death Zone'. We may have to give it until today, but that suggests the market remains buoyant into quarter-end. That said, any break of 1333 (2X low) and the 50 dma with authority probably means the rally from June 4 and 1267 is over.
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