Consequently, we focus on the benchmark S&P 500 (and the SPY) to determine the probable short-term trajectory of the market when looking for names to trade.
In my experience, the key to any trading game plan is to keep things simple. Often, a straight line offers the simplest assessment of likely market tone, at least for the next few sessions.
Let's drill down to a 10-minute SPY chart from last week's lows.
Note that Tuesday's low tagged the lower rail of a rising channel.
Connecting a trendline from the August 7 pivot high and the August 11 pivot high and paralleling a trendline off the August 7 low gives Tuesday's low.
Note the 3 little drives to a low on Tuesday followed by Wednesday's gap. The gap triggered an Angular Rule of 4 Breakout -- albeit this is on a very short-term basis -- but this 10-minute pattern validated the presumption for a trend day on Wednesday -- as well as the move to satisfy 1947 SPX and the 195 SPY strike.
The recent action shows the benefit of looking at the market from the perspective of the Square of 9 because 90 degrees down from the 1991 all-time high is 1947. When 1947 buckled. the presumption was an extension to 180 degrees down at 1903 would play out.
The low for the decline (at least so far, has been 1904.78).
The bullish Train Tracks on the SPX dailies on August 7/8 suggested the possibility of a snapback to 1947.
The SPX shot up to 1947 early Wednesday and consolidated.
Mr. Market knows the number.
Is the SPY bull-flagging (on its 10 min) for another little Rule of 4 Breakout (a breakout of a triple top trendline)?
A breakout with authority above 195 SPY implies a move that will kiss the illusive 2000 SPX level.
As shown recently, this ties to a possible bearish backtest of a broken trendline on the dailies.
With the SPY coiled at the 195 strike going into Friday's option expiration, a break below Wednesday's consolidation could perpetuate another test of the lower green rail near 194 SPY.
If that plays out and it holds, another short-term higher low would be installed if the SPY turns to the top side again.
So the action here at 195 is pivotal.
We didn't get a summer melt-up but we may be getting a summer backtest into the important late August/early September anniversaries.
Late August/early September ties to many historic market turns such as the return rally test failure in 2000 (from a spring high as well), and the 1929 and 1987 highs, both of which were preceded by years of persistent advance.
The first week of September will be 180 degrees from the early March pivot high just as the expected low in the first week of August played out 180 degrees from the February low. Interestingly, that low was 180 degrees in price from high.
So these 180-degree harmonics are rippling through the market putting the first week of September on the clock.
A new high in late August/early September accompanied by more internal divergences such as those occurred at the July turning point followed by a rollover warrants caution. But first, the market must prove the case for higher prices on recapturing 1947/1950.
If momentum shows up today/Friday, it is worth noting that 1976 (SPX) is straight across and opposite August 15 on the Square of 9 Calculator.
If that plays out, it could mirror the July 24 square-out with 1991 being straight across and opposite July 22/24.
So squeezage into Friday to 1976-ish could carve out another pivot high. If that occurs and a conspicuous decline follows, the double square-outs could be an indication of a double top.
Conclusion. Stock indices declined into the time frame where a low of some degree was likely (August 8). Whether that was another intermediate low on another undercut/flush of the 50-day moving average on the SPX is unknown.
The price action is impressive since last week's low, but then again, the hallmark of bull markets is quick, sharp setbacks followed by a resumption of the underlying trend.
So the action at this key 1947-1950 level will be very telling.
Theoretically, there is a second higher low on the clock for 2014 since the February low for the year was set.
At the same time there we have a third undercut of the 50 dma in 2014. Markets typically play out in patterns of threes so the SPX must capitalize handsomely on the current pattern, or we could see or a stall-out or double top (which includes a nominal new high kiss of 2000) will leave the market vulnerable.
A change in behavior on a break back below last week's swing lows and another quick break of the 50 dma would be a bearish sign. Another break of the 50 dma in short order undermines the idea that another intermediate low on an undercut of the 50 dma is in place. While that eventuality may simply suggest a quick trip to the 200 dma, it is worth considering that a change in character could well indicate a 20% decline, which we have not seen since 2012.
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