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.
Let’s take a look at how this same concept played out in some of the glamorous names.
Ralph Lauren (RL) opened on its low on Monday and tailed back up to close near its high, failing to snap support. On Tuesday, the chart broke.
Priceline (PCLN) didn’t even know the market had indigestion on Monday. On Tuesday, it made a new high to put the hook in before carving out an outside down day.
Ditto Chipotle (CMG).
Ditto Apple (AAPL). I would watch the 639/640 level carefully as noted yesterday as that is a potentially important pivot and may carve out a little right shoulder.
See the Apple daily from yesterday’s report:
Another usual suspect, Lululemon (LULU), was unfazed by Monday’s market weakness but got louped yesterday.
Conclusion. All the charts broke yesterday, confirming the daily and weekly sell signal bars in the S&P we noted on Monday.
However, after five consecutive losing days in the S&P/SPY and a test of this lower rail, the odds favor a rally attempt with the SPY closing near short-term support, and compressed on a low-tick close.
That being said, for a number of reasons, a better risk-reward scenario would play out from a down open which tested the 1347-ish level.
1347 squares (90 degrees) the high day and is 180 down from high.
After a large downside day, a reversal typically plays out from a down open, not an up open.
Be that as it may, that does not mean the market cannot rally from the get-go, but, technically, it does imply that if it does so it will have more work to do before a more sustainable rally sticks in my work.
The market does not exist to accommodate, and it looks like the market is going to open strongly without giving a good risk-to-reward down open for a scalp long. While today may turn out to be a green day when all is said and done, I think an up open above 137 SPY right off the bat sets up as a first-hour high and a short.
As the hourly SPY implies, there is initial resistance that starts at 137 where yesterday’s downside acceleration began, and 137.75, with the 50 dma defining a nice short reference point at 137.50.
The early leaders like Caterpillar (CAT) and Deere (DE) led to the downside, and it is important for the bulls that this was the last shoe to drop in these cyclicals for this particular move, rather than a Get Out of Dodge stampede out the door.
The Russell 2000 (^RUT) is in free fall turning its Monthly Swing Chart down yesterday in one fell swoop. The RUT looks like a laser beam targeting a backtest of the big January breakout which ties to its 200 dma. It may take such a move until money managers are willing to step up to the plate in earnest.
The Monthly Swing Chart on the S&P will turn down on 1 tick below the 1340.03 level in April. This will leave a bearish outside-down month, a mirror image of October’s outside-up month. That eventuality would suggest that the S&P plays catchup with the RUT and backtests its January breakout as well. This also ties to a test of the 200 day moving average near our old friend 1258 S&P. A 50% retrace of last October’s 1075 low to April’s 1422 high gives 1248 which ties to the above technicals as well. One complete revolution of 360 degrees down from 1422 gives 1275.
Even if this is the beginning of a deluge to 800 S&P as shown recently, the odds favor a rally attempt soon so the bears need to exercise some patience.
This is a big break, but I suspect the Fed is in the wings and animal spirits don’t die that easily. If there is still bullishness around and the economy is still afloat, in theory a move that recaptures 1380 S&P could resurrect things. I’ll believe it when I see it as I think the news breaks with the cycles and the news looks like a global double dip.
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