Instant Karma Silences The Wolves
A probable turning point for the market.
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Instant karma's gonna get you
Gonna knock you off your feet
- Instant Karma (John Lennon)
True straightness seems crooked.
True wisdom seems foolish.
True art seems artless.
- The Tao Ching (as translated by Stephen Mitchell)
On Wall Street, the unthinkable can happen and often does. Not only can the market do anything, it will do anything. The past week has seen political and financial denouements as great as any Greek tragedy.
The speed at which the deleveraging has developed may seem shocking, but it's no more stunning than the market's ability to cruise in the eye of the hurricane as long as it did. The speed at which Alan Schwartz of Bear Stearns (BSC), who said there were no problems last Wednesday, was blindsided is bizarre. From business as usual to bankruptcy in 48 hours.
Instant karma? Not really so instant. The archives of Minyanville have been filled with the intimations of immortality of the credit and equity markets for some time and from many professors.
It's been nearly nine months since I first warned that cycles indicated a financial panic was due to play out. At the time I knew nothing about subprime or collateralized debt obligations (CDO's), but price and time harmonics, complacent sentiment and the persistence of the trend underscored the vulnerability associated with years ending in seven.
Indeed, the size of the derivative market, and the degree to which leverage was being employed, suggested that there was a strong likelihood of a 100-year financial flood mimicking the Rich Man's Panic in 1907.
The saga of the bursting of the credit bubble that's gripped the Street since last summer saw the latest shoe drop this weekend with the fire sale of Bear Stearns. In an echo of J.P. Morgan, the man, coming to the rescue in 1907, this weekend J.P. Morgan (JPM), the company, rode to the rescue with the backing of the Federal Reserve.
It's interesting that the seeds for the inception of the Fed were sown in the Panic of 1907.With the Fed coming up with a new initiative nearly every week or so now (to little avail, at least so far), it will be interesting to see if this game of high stakes strip poker will leave the emperor naked at the end of the bear market.
Another Friday through Monday meltdown scenario was averted as the market once again came back from the brink. With the futures down nearly 40 points on Sunday and the S&P cash at a low of 1257, it seems there was little chance that my inhterpretation of January as a cyclical low that would hold for some time would be proven wrong. Yet, remarkably, the S&P closed above the January 1270 intraday low and settled at 1276.60 on Monday. It's noteworthy that, in studying the square of nine calculator, I notice that 1257 vibrates off the date of the mid-August 2007 low.
Fast moves come from failed moves and false signals. On March 11th the popular indices scored their largest gainer in five years. By the measure of some technicians, it was a bullish 90% up day. However, the geometry of the market spoke last week as the S&P was unable to close meaningfully above the key 1320 pivot. This is a level that has been coming up for weeks as pivotal. The S&P rolled over after tagging 1320 last week, carving out a 90% down day last Friday, March 14th.
The good news for those of us keying off technicals is that, despite all the chaos, the market's respecting and adhering to an innate geometry, albeit one that's not always easy to interpret. 1275 and 1320 have clearly been levels to define the current price action. So the question is, Was Monday's undercut of the double bottoms 1275-ish enough of a flush out, fear-producing plunge?
It doesn't look deep enough to satisfy the idea of the V part of a WV bottom, but then again the July 2007 overthrow of the March 2000 top was marginal as well.
If yet another plunge is to come, theoretically the level to look for would be around 1238. For the time being, it will be up to the market to rule out a further drop by a move above 1303 that holds. Why? The range of the March 11th thrust was 46 S&P points. Eclipsing that range should indicate the market wants to go higher. Adding 46 points to Monday's low of 1257 gives 1303. This is approximately the same level from where the S&P exploded on March 11th. If 1303 is captured and holds, it should be a bullish omen for a rally to tag last week's highs. Then the market will speak loudly. But the first test, as the hourly chart below demonstrates, will be near 1290. This may be just as critical a test for the S&P as was last week's resistance at 1320.
While bottoms are a process, not an event, Monday was historic. Right or wrong, the Fed has selected its sacrificial lamb and sacrificed it to the Gods of moral hazard. Often such cataclysmic failures mark cathartic turning points. While it's impossible to tell the exact nature, duration or magnitude of the turning point, if that's what's at hand, I expect, as mentioned on the Buzz & Banter, Monday morning to be the low for the week.
Follow through above the 1290, then 1303 and then1320 project a likely move to 1350-ish. A move above 1350 suggests an extension to 1390-ish. The important thing to remember is that the behavior on the next turn up of the Weekly Swing Chart will define a possible bottoming formation. If the 50 day moving average (DMA) on the S&P is recaptured and holds, I believe it signals the beginning of an advance of 10% or more in April that could see the S&P tag its 200 DMA.
While cyclicals, metals and oils appear vulnerable, many techs such as Intel (INTC) and Apple (AAPL) look like they're under accumulation. Other prior glamors such as Garmin (GRMN) and Itron (ITRI) appear sold out and poised to rally.
A) On Monday AAPL exploded after a Short-term Rule of 4 Breakout over an Angular short-term 3-Point Trendline. A move back over 128 projects to 130 while a move over 130 breaks AAPL out.
Bullishly AAPL opened at/near the low of the session on Monday (A) holding a Live Angle (B). Trade above the 130 strike (C) should see an extension toward the 50 DMA.
While the bear market may ultimately have more time to run its course, the events over the past few days echo many of the concerns inked in the 'Ville for over a year. While there may be more choppiness, time on the side and a plunge to new lows, I suspect the rally that's soon to unfold will unfold like instant karma, out of the abyss. That advance may not be ready to reveal itself until many of those in the know stop calling for a bottom. The silence of the wolves should be the sounds of a rally stirring.
A)On Monday the EEM left a Gilligan Buy Set-Up at a higher low and a test of the January low. A gap up on the EEM that holds could see an Island Bottom Reversal installed.
S&P 10 Minute
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