When you see that trading is done, not by consent, but by compulsion -- when you see that in order to produce, you need to obtain permission from men who produce nothing -- when you see money flowing to those who deal, not in goods, but in favors -- when you see that men get richer by graft and pull than by work, and your laws don't protect you against them, but protect them against you -- when you see corruption being rewarded and honesty becoming a self sacrifice -- you may know that your society is doomed.
-- Ayn Rand, Atlas Shrugged
In 1929, the Federal Reserve Bank was a deer in headlights. It promised to never act that way again.
If you want to understand the Fed following the crisis of 2008 under Bernanke, Ben's salute on the occasion of Milton Friedman's 90th birthday helps crystallize things:
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right; we did it. We're very sorry. But thanks to you, we won't do it again.
The Fed was a deer in headlights in the Great Depression. And in the last five years, the Fed has been the headlights.
But the light at the end of the tunnel may not differ.
New Fed chairs are usually tested by the markets with a 16% correction on average in the first year.
Earlier in the week, I showed the following chart, which was forwarded by a friend:
Click to enlarge
Yesterday may have begun a similar test for new Fed Chair Janet Yellen as the cascade setup warned about earlier this week [subscription required] seems to be unfolding on trade below the March low and the 50-day moving average.
On Thursday April 10, Yellen tried to jawbone the market, and a few hours later, the market landed a left hook on the bull's jaw.
I can't remember when I've seen two such breathtaking reversals in a span of just four days.
First, last Friday (April 4), the S&P 500 (INDEXSP:.INX) set a new all-time high before turning down sharply, leaving a Key Reversal Day. Then, following Wednesday's (April 9) spike up and one-day turn up in the major indices, markets crashed, with the S&P carving out an outside down month.
Eerily, the urgent selling continues to follow the analogue, time-wise and pattern-wise, that I flagged in early March, from the 1987 crash when a one-day turn up preceded the beginning of a waterfall.
A monthly S&P chart shows that the last time an outside down month occurred from highs was July 2007. In fact, that had been the last outside down month in almost seven years. It is the only remotely recent outside down month other than January 2009, which perpetuated the plunge into the March 2009 low. Interestingly, the few months following the July 2007 monthly reversal marked the October 2007 major top.
As above, so below?
From the point at which the monthlies turned down in July 2007 (on trade below 1484), the S&P slid over 100 points to 1370 within weeks before a return rally tested the highs. Is the S&P set to slide over 100 points right here?
A similar 100-point-plus decline following yesterday's (April 10) turn down in the monthlies on trade below 1834 projects to around 1720.
Bearishly, trade below 1737.92 will leave an outside down quarter.
Monthly S&P Chart:
Yesterday's stab down left multiple daily sell signals. It left an Expansion Pivot sell, which is a large-range move through the 50 DMA. It left a 180 sell, which means a close at or near session lows following a close at near session highs below both the 10 and 50 DMAs.
Additionally, the S&P triggered a Rule of 4 Sell signal on trade through triple bottoms carved out in March.
Daily S&P Chart:
It looks like there is no support between here and a rising trendline connecting the October and February lows below 1800. This ties roughly to the 200 DMA.
As offered earlier this week, if accelerated momentum shows up, April 11-14 ties to 1780 on the Square of 9 Chart.
Could a crash scenario play out? Crashes are rare birds, but if one is going to happen time, price and pattern are ripe for one. Many historic cycles cluster in April, and this one was kicked off by the 60-month cycle high on the fifth anniversary of the March 6, 2009 low when the NASDAQ 100 (INDEXNASDAQ:NDX) and the Russell 2000 (INDEXRUSSELL:RUT) made highs.
The monthly S&P chart seen above shows that a decline to the aforementioned 1780ish level would snap a rising trendline from the major October 2011 bottom where the persistent, near-parabolic uptrend began.
A break of this trendline could coincide with selling in the large-cap S&P stocks like Caterpillar (NYSE:CAT) and IBM (NYSE:IBM) that have been untouched thus far.
Daily Caterpillar Chart for 2014:
Daily IBM Chart for 2014:
A break of this three-point rising trend line from October 2011 could see follow-through on selling that may offset February's low. Because February was an outside up month, trade below February's low would trigger a bearish monthly Reversal of a Reversal signal. In other words, February was an outside up month, which if reversed within a few bars, would be a reversal of a reversal. This is on a monthly time frame, so it speaks to the idea of a potentially substantial change in trend.
It is interesting that June 2007 was a relatively narrow range month prior to July 2007's outside down reversal as was March 2014 prior to this month's outside down reversal.
It is also interesting that the seven-year cycle, which marked a high in 2000 and 2007, may be exerting its influence here in 2014.
It is not my desire to be a fear monger or doomsayer. Rather, it has been my desire to point out that markets are always in the process of moving from one extreme to the other. There is a time to buy and a time to sell. All cycles begin and end.
March and April was set to usher in many cycles, and even some historic "once in a lifetime" events according to some cycle analysts.
So, let's take a look at a lifetime cycle of 80 years in the markets.
On the 80-year cycle, there was a great crash in 1929 with a generational low in 1932 and a Great Depression through the 1930s. In 2008, there was a great crash and a "generational" low in 2009. Are we in a depression? Will we be in one?
Forty years ago marked the largest turndown since the Great Depression with the October 1974 low at 62 on the S&P.
Click to enlarge
On the Square of 9 Chart, 62 is 90 degrees square March 6. The low in the Dow Jones Industrial Average (INDEXDJX:DJI) in 1932 was 41 (40.56). On the Square of 9 Chart, 41 aligns with March 6.
Click to enlarge
As W.D. Gann said, all major highs and lows are related in time and price.
The logarithmic chart below is an 80-plus year snapshot of the Dow.
Click to enlarge
It demonstrates what looks like a mid-point in the mid-1970s.
The implication is that a Broadening Top may have been playing out during the last 13 years with a decline that ultimately retraces to the 2002 low, or to below the 2009 low.
Whenever this cycle ends, it will begin the process of making a retracement that nature has designed to correct the excesses of the prior move.
The move refers to the entire distance from 41 on the Dow to over 16,000, or from the 1974 low to whatever the high of the cycle will be.
Whether current excesses may be corrected by a short-lived crash like 1987 or 1929, a slow-motion crash like 2008, or a long drawn-out bear market like the 1970s, which also had a devastating two-year decline into late 1974, no one knows.
My message is one of perspective. The last crash was really 1987's. It was a true crash because it all took place in a few days, with a devastating three-day loss of almost 33%. The "crash day" itself had a 22.5% decline. Yet, the 1987 crash looks like a non-event on the long-term chart.
Keep this in perspective.
Has the 80-year cycle unwound yet? It may have been masked by the Fed's actions.
The message of the market is that the emperor may have no clothes. It may be that those money managers, who were conservative for the first few years off the 2009 low, were in a frenzy to play catch-up after the 2010 and 2011 double bottoms, which culminated in a vertical phase in 2013.
Conclusion: Market participants and money managers who were conservative in the first few years off the 2009 low may have been pressured to chase the markets in 2013, squeezing momentum names to extremes. In kind, that induced shorts on glamour stocks selling at outrageous multiples of revenues. Since those shorts got squeezed out, as was the case of many of the momentum stocks into early March, who is left to buy once they cover? When one sector of the market like the Nasdaq or Russell implodes, the rest of the market is usually not far behind.
As a friend of mine says, "The worst go first."
Strategy: I know that following intraday alerts from Thursday (April 10), many of you have taken short positions in the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS) or the ProShares UltraShort SmallCap 600 ETF (NYSEARCA:QID). This may be another three-day waterfall event with a Gap & Go today.
Monday should be interesting.
Form Reading Section:
Wynn Resorts (NASDAQ:WYNN) Chart:
WageWorks (NYSE:WAGE) Chart:
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