Is the S&P Ready to Rock or Heading to 800? The Spiral Chart May Hold the Key
The market may be heading for a significant downdraft following a relief rally.
When you’re lost in the rain in Juarez
And it’s Easter time too
And your gravity fails
And negativity don’t pull you through...
--"Just Like Tom Thumb's Blues" (Bob Dylan)
I recently noted in the Daily Market Report (subscription required) that the most genuine changes in trend (whether they be the primary or secondary trends) start from a false move, or a hook, and that one should be aware of such a false start to the second quarter.
This hook in the first week of April coincided with 90-degree cycles from the major lower high the first week of July 2011, the major false undercut low the first week of October 2011, and the acceleration to kick off the first quarter of 2012.
At the same time these shorter-term cycles were due to exert their influence, there were various long-term cycles from the spring of 1937 and 1962 set to bear down on the market.
Coincident with these cycles, the Spiral Chart or Square 9 Wheel articulated an powerful potential time and price relationship 1421/1422 on the S&P 500 (^GSPC) on April 2/3.
We showed this time/price square out in Monday morning’s report (subscription required).
As you can see, the Spiral Chart, or Square of 9 Chart, is so-called because the first "square" ends with the number 9 and spirals out into successive squares, creating a number grid which is circumscribed by the dates of the year.
Markets tend to crystallize in harmonics of 90 degrees with a complete progression being satisfied by one full revolution, or square, of 360 degrees. This squares the circle.
A true square is 1.5 revolutions of 360 degrees, or 540 degrees, as a true square is a 6-sided cube (six 90 degree angles equaling 540 degrees).
From the 2002 low at S&P 768 to the final 2007 top at 1576 represented an advance of 6 squares.
The numbers that align with that major yearly low and major yearly high are called Master Squares. Note that 1421 vibrates off this same alignment, being 1 revolution below 1576.
Arguably, the most bearish case is that a major backtest played out at 1421, following 3 drives up on the monthlies from the March 2009 low, which culminated a 12-year topping process. If so, an ensuing secular bear market may see a decline toward 800 or lower to satisfy a third drive down following the bear market into 2002 and 2008/2009.
The bull case, as offered in Monday's report, is that the 60-year cycle from 1952 and the 90-year cycle from 1922 argue for many years of higher prices after a correction that should end in the fourth quarter. The bear case is that that the 60-year and 90-year cycles invert, in which case a hard rain’s a gonna fall.
But back to the present. That 1421 satisfied an important relationship in and of itself doesn’t mean a top. However, this PRICE vibration also "squared" April 2/3 for a TIME relationship as well.
Click to enlarge
In other words, at 1421 on April 2/3, time and price met at a hard right angle.
Now, not every square out is a major high or low but all major highs and lows are square outs.
When there is a cluster of harmonics, the weight of evidence stacks the odds in favor of a turning point.
Yesterday was not destined to be a Turnaround Tuesday, but more of a Tourniquet Tuesday. This was the takeaway from the daily SPY chart shown in Tuesday morning’s report, which showed a second Breakaway Gap (on Monday) and the bottom rail of a channel for the year just below 136 SPY. Tuesday, the SPY scored a low of 135.76 before settling at 135.90, satisfying a full test of the channel and a flush of the 50 dma.
We followed up with a morning alert: The First Mouse Gets The Squeeze, The Second Mouse Gets The Cheese (subscription required).
The runaway move up from early January is over. This change in character is defined by the failure of Thursday’s Plus One/Minus Two Buy setup. This setup elicited a rally on every occasion this year. That being said, yesterday’s decline held a 50% retrace of the last little leg up. The SPY is trying to cling onto a trendline connecting the prior corrective lows from the first quarter. However, it looks like at a minimum that a full test of last year’s May high at 137 is in the offing. This also ties to a first kiss of the 50 day moving average.
Typically, the first time down to a test of the 50 sees a rally attempt. Be that as it may, while moving averages are well-respected technical benchmarks, often times they are "flushed out" or undercut before a reversal ensues.
Such was the case with the 20 dma on the 3rd anniversary of the March 2009 low on March 6.
I would not be surprise to see an undercut of the 50 dma play out toward 136 SPY, coincident with an expansion in bearish sentiment on this sell-off, which would tie to the lower rail of a trend channel before any meaningful rally attempt.
When the 50 dma on the SPY/S&P, which tied to last year's 1370 high, snapped yesterday, the market accelerated like a heat seeking missile to test the lower rail of the daily SPY channel just below 136.
The notion of Hoofy’s Hook (offered above) and the first mouse getting the squeeze and the second mouse getting the cheese played out in many ways this week -- and it’s only Wednesday.
For example, despite Monday’s Breakaway Gap, the opening essentially marked the low and the brunt of the damage for the day. Those who shorted Monday’s open and well-advertised daily and weekly sell signals were squeezed throughout the session. Tuesday got the cheese for the bears.
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