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Xanadu Redux


The important thing to remember is that runaway moves - like the one we are in - by definition do not pause long.


In Xanadu did Kubla Khan
A stately pleasure-dome decree;
Where Alph, the sacred river ran,
Through caverns measureless to man
Down to a sunless sea.

The market paused Thursday with most stocks little changed. Although the DJIA pushed its way through the 13,000 benchmark, and Apple (AAPL) reported blowout earnings after the close Wednesday; it didn't galvanize support for a follow-through move and a push above the1500 handle on the S&P.

The S&P traded marginally above Wednesday's high to 1498 before pulling back to close down just over a point to 1494.25. As shown on a ten minute chart below, the big dogs tried a repeat performance of Wednesday's late-day breakout , but it fizzled. The short-term key level remains Wednesday's breakout pivot of approximately 1488 S&P.

I mentioned in the Buzz & Banter how Wednesday's move had eclipsed all levels of resistance in my work, that the cow was out of the barn, and Hoofy was apparently in love. But just because it's all blue sky doesn't mean it's all clear sailing. Although price projections have been exceeded in my work, we are still in the window of what may be a turning point in time. That's a maybe. Which means it's worth watching to see if price does something unexpectedly negative. At Wednesday's close I would have thought the market could have easily capitalized on the move and hyperventilated higher in a continuing parabolic phase. Obviously the market did nothing wrong on Thursday and it may be simply a pause day – as opposed to a paws day.

The important thing to remember is that runaway moves - like the one we are in – by definition do not pause long. The other important thing to remember is that legitimate breakouts do not offset their breakout points (1460 in this case) quickly and that large range extensions on the heels of a well-traveled and persistent advance should not be offset or rejected quickly, or it may indicate a buying climax has occurred.

At Wednesday's close I assumed strength would exert more strength, and that the market would mimic Amazon (AMZN). I assumed that this momentum mambo appeared poised to stiletto the 1500 S&P like it had the DJIA 13,000. However, just as I was ready to buy into the argument for higher prices, and the grasp for Alpha, a piece of symmetry popped out at me. It will probably go right into Hoofy's Cuisinart like all other levels. But here it is just the same: I have mentioned in previous posts the importance of 1475 S&P as it was a harmonic of the Master Square of the 1553 all-time high. I failed to look at harmonics off the October 2002 low – the Master Square off that low is 768 S&P. Opposite 768 is, yup, you guessed it, 1498 – the S&P's high on Thursday. What is interesting about using the Master Square from the low is that 1460, which was the February high, is also a harmonic – being 90 degrees down from 1498. It is also interesting that the significant 768 low vibrates off July 4th, as the first week of July in 1932 was the significant low after the 1929 crash. This 1498 level is simply something to be aware of, should we get a tail week - for example, a new high such as we have had this week, but a poor Friday close – which remains to be seen. This is just a level to be aware of, not necessarily a target to shoot at. But without a way to measure risk, there is no way to manage risk.

Click for larger image.

Seasonally speaking, the copper rally is entering a dangerous time frame. There are two axioms for copper:

  • Sell in May and walk away
  • Bull markets have copper roofs

Copper sold off substantially on Thursday, taking down Southern Copper (PCU), Companhia Vale do Rio Doce (RIO), and Freeport McMoRan (FCX) (which continued lower after good earnings earlier in the week). Check out Sally Limantour's pithy post on the Buzz. Another usual suspect in the basic materials sector, Terex (TEX), sold off in good earnings while gold got a shiner as it fell out of bed while oil tailed off. As Todd asks, "Will commodity volatility once again precede equity movement?" We remember the squall that began in early May last year in which commodity weakness was the tell.

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