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Anniversary of Important Historical Lows


...everyone knows that the market always comes back. It has proven itself time after time. Everyone has learned the lesson.

Shake it up baby now
Twist and shout
Come on come on come on baby now
Work it on out

--Twist and Shout (as performed by The Beatles)

Maybe W.D. Gann wasn't just whistlin' Dixie about anniversary dates in the market being important. Mid-week was one of the most important anniversaries in the stock market. Not only was it the anniversary of the October 2002 low, but it was also the anniversary of the big October 1990 low.

The geometry of both dates is cyclically important as the prior signifies a 60 month periodicity and the latter signifies the 17 year Cicada cycle which I referred to going into this year's July peak.

Importantly, that October 1990 low marked the end of the correction from the 1987 peak. Although, the market made a new intervening high above the 1987 high prior to a strong decline, it was a relatively short-lived and relatively marginal new high and I view the whole three year period as a corrective period. As I offer many times, the market often plays out in threes.

The 1990 low is significant as it marked the beginning of the massive bull market of the roaring nineties. Consequently, the notion that this October, 17 years from low and 5 years from low may mark a peak more significant than anyone is discussing cannot be dismissed out of hand.

After all everyone knows that the market always comes back. It has proven itself time after time. Everyone has learned the lesson. Everyone knows Ben is their friend. Everyone knows the market is out of the woods and the worst is behind us as to the credit crisis. The question is whether what everyone knows is worth knowing. Is the recent truth of the tape a crowded truth?

There is an old market saw: as above, so below. I mentioned this in connection to the recent large range breakout in the Tell of Tells, Goldman Sachs (GS). I wondered whether the breakout was equal and opposite to the large range extension at the mid August spike and reversal. The important thing to remember about breakouts is that they are many times the most dangerous point of a trade: it is not the breakout in and of itself that is important, but the ensuing price action... follow through is key. The market doesn't move, it is moved. Many times the big players will buy something to bang it---drive something up to create bids in order to liquidate and distribute large positions. And, conversely sometimes the big players will bang something down in order to flush out the stops and accumulate size. This is just the nature of the beast. We're not trading against choir boys here.

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In other words, large range breakouts can define continuations and new advances or they are sometimes climactic action representing peaks. This is especially true after a sustained run. The advance by GS off the August reversal was certainly a long run---a least point wise. A lot of ground was covered quickly.

A lot of ground was covered quickly by the broad market as well. Is it possible that the "insiders" and constituents of the Fed were and are loaded for bull into next week's expiration right into the aforementioned key anniversary dates and needed to spike the market to a new high in order to more easily liquidate? Someone big certainly bought beaucoup 157 Spyder puts yesterday while shorting beaucoup 157 Spyder calls... 35,000 times. Usually this is not a random conglomeration of orders but rather that kind of size points to someone big. Someone that big usually doesn't get that big and bang that big unless they know something. Was the fix in? It certainly felt like the market was ambushed on Thursday. The vicious reversal came like a thief in the night. As I mused in yesterday's column, who is left to buy? The bulls were all in the deep end of the pool and long up the ying yang when the ying and yang of a possible square out hit a brick wall at 1576 S&P. Hey, it's not nice to fool with Mother Nature.

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As above, so below? Was Thursday's large range reversal a mirror image of the large range reversal on August 16th? Is this July's peak and a possible October marginal new high a mirror image of the July 2002 low and October 2002 marginal new low?

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The large range reversals on many leading names on Thursday and the rapidity of their decline shows the market is respecting the geometry of the 1576 square out and the cycles. To recap 1576 is an important six squares up from the 768 S&P October 2002 bear market low. Six squares represents a possible major culmination of price as six cycles or squares of 360 degrees is a true square or cube. In my way of thinking, in my experience, six squares of 360 degrees represents the philosophical equivalent to squaring the circle.

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Approximately thirty days from the July high the market found a low. I recognized the geometry of that potential reversal as it was setting up and expected a retracement however I incorrectly assumed that another leg down would play out into the fall. I certainly did not envision a test of the high. Approximately sixty days from the July peak, the market exploded on the Fed's slash and burn interest rate cuts. It is interesting that the 20 year anniversary of the 1987 shake up will coincide with next weeks October options expiration, ninety days from the July peak. In 1987 the high was scored on August 25th and although the intraday low was in late October, the closing low of the decline actually occurred approximately 97 days later on December 2nd.

It's October fest, have a stein of volatility and buckle up for the markets seasonal twist and shout. Crowd behavior, it's a livin' thing.
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