First Leg of Bear Market is Over
The low for the year appears to be in.
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I did my best to notice
When the call came down the line
- Human (The Killers)
The low for the year appears to be in.
As offered yesterday, there was a better than average likelihood that a rally phase would play out from Friday's reversal that would last weeks if not months--pullbacks and some kind of a test notwithstanding. With Monday's follow through, a significant low was carved out and the low for the year installed.
Not all reversals are created equal. The break below the well tested levels of the October 10th panic spike low and reversal which generated a break below the 2002 lows and then the ensuing reversal back above the 2002 and 2003 lows is the structure of a final low. It is not knowable if it is the final low for the bear market, but it may very well be the final low for the first leg of the bear market. Everything looks as if the panic phase is over for this particular section of the bear, even if the market drifts lower over coming weeks.
However, the important thing to remember is that given the Slaughter House Five structure of 5 and 7 waves down subdividing that the market was compressed when it came within 3 points of our 738/739 key S&P level (1/2 the 102 1982 low and the 2007 1576 high). Moreover this level represented a major Time & Price Square Out as that price level resonates, or is a harmonic of the anniversary date of the 2002 low and the 2007 high: i.e. October 10/11.
Moreover, it is important to note that our first panic low and reversal occurred on October 10th and Friday's price squares that date. Not all reversals are created equal. The spontaneous combustion from that level and FOLLOW THROUGH on Monday proves the geometry of the level. The move right back through 50% of the 1982 to 2007 range or 839/840ish proves the geometry and significance of the square out. So the market has a good chance of surprising on the upside just as the Street expects it to go right back down after these sharp bear market rallies -- like it always has.
The key level was tagged just after a key cycle was due to have bottomed. Remember the charts depicting the 1929 undercut of the initial crash bottom and the cycles showing that time for the decline was up in mid-November, a period I have been pointing to as a cyclical turning point for months. That pattern has played out. Now we await confirmation as to the price action by the Weekly and Monthly Swing charts.
There is always a wrinkle in Mr. Market's behavior. The decline extended beyond the idealized mid November cycle date allowing the bears to become complacent about an Armageddon Set Up. But, crashes don't usually come in pairs. Capitulation is not cheaper by the dozen.
Nevertheless, the pattern of the 1929 first leg fits well. Ditto the idea of a low 6 to 7 weeks following an initial panic low (October 10th) such as occurred in other instances depicted in this space such as the pattern from 1987.
The above square outs and geometry should not be taken lightly. I have seen more money lost by smart traders shorting retracements after a washout low has occurred than I have seen in any other strategy. It is the other side of the fertilizer trade for example: names in that group proved so untouchable and so impervious to declines that the strategy du jour was to buy all pullbacks. That was the correct strategy to adopt--until it wasn't.
The trick is to identify when a Blowoff to the upside or a Climax to the downside has shifted the playing field advantage. Trend following is the uber strategy if you can recognize when the trend is changing. One of the easiest ways to do this is if your set ups start failing and what you were doing ceases to be profitable. The market has a way of telling you if you listen.
Conclusion: The market gave a technical buy signal by undercutting the 2002 low and then stabbing back above it immediately on the important weekly Friday close. Redemptions may be done. The first target of the prior closing lows near 850 have been hit quickly a show in charts yesterday (seen here again).
The closing low on 10/27 was 848.90. The closing low on November 12th was 852.29. Interestingly, 854 is 360 degrees in price up from Friday's 841 low. Once those well tested lows were broken one could have assumed a 360 degree flush out could play out and they would have been spot on. This further proves the geometry and that all reversals are not created equal.
A 'corrective' 540 degree move up would be 917 while 975 represents a 720 degree move up off the 741 low. Initial targets remain 900 to 917 and a primary target would be as high as 975. The November high is 1008 which is just above 975. There creates a set up wherein the S&P could spike up and turn up the Monthly Swing chart in early December on trade above the November high, overthrowing 975 in the process and kissing the declining 50 dma now at 990. That will be a significant test for the S&P.
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