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The Other Side of the Moon


Unmatched by any run since the 1920s, the record streak of up-days in the DJIA following the March shakeout has been well publicized. What has received very little press is the other side - the dark side of this silvery orb.

And if the cloud bursts, thunder in your ear
You shout and no one seems to hear.
And if the band you're in starts playing different tunes
I'll see you on the dark side of the moon.

-Pink Floyd (Brain Damage)

"This is the way the world ends,
Not with a bang, but with a whimper."
-T.S. Eliot

"There is no dark side of the moon really. Matter of fact it's all dark."
-Pink Floyd

To borrow from Eliot, "All eyes are gathered on the beach of a tumid river," as the markets took their cue from Chinatown last night going into the close of what looks to be the worst week since March.

On US shores, traders will be eyeing the rails of the Holy Grail – the 20-day moving average, so-called because strongly trending markets tend to ride the tracks of the 20-day; pull-backs to the 20-day moving average acting as good support and good buying points. Hence, the moniker, Holy Grail.

A look at the chart below of the S&P certainly bears this out, as the index has not violated its 20-day moving average since recapturing it in March. Sometimes when the 20-day moving average fails, it fails not with a whimper but with a bang. On February 26th, the S&P closed marginally above its 20-day moving average. The next day it gapped below it, crashing, as the "chalice" failed to support.

On Thursday the S&P closed on its 20-day moving average again. It will be interesting, to say the least, to see if Thursday's reversal of fortune – with the DJIA going from up 100 to closing down 85 points, ends with a whimper or a bang. Will history repeat?

The chart I showed in yesterday's column is worth another noodle, especially as the FXI stabbed down through its 20-day moving average on Thursday and closed, perched precariously, just above the 50-day moving average. A break of its 50-day moving average would suggest a test of the March lows and its 200-day moving average at 95-ish. The FXI closed at 110, down 3 points on Friday.

Unmatched by any run since the 1920s, the record streak of up-days in the DJIA following the March shakeout has been well publicized. What has received very little press is the other side – the dark side of this silvery orb. Such stretches correlate well with final flings for Hoofy – a run for the red roses, or red capes so to speak. The last advances in bull markets tend to exhaust themselves in near vertical ascents called blow-offs.

Typically these blow-off phases last for three months – sometimes four months. Two of the most infamous blow-offs were in 1929 and 1987. Both lasted approximately ninety days, and erupted just after a period of substantial, but short-lived volatility. The severe shakeout into March this year and immediate recovery certainly qualify as an accelerated volatility phase.

So the characteristics and earmarks for a blow-off phase are present. The prior blow-off examples in 1929 and 1987 are notable for the crashes that immediately followed. The market didn't just exhaust itself after blowing-off and moving sideways. It turned, and turned on a dime.

But, there were warnings. The market spoke. That is why the market behavior at the 20-day moving average is important. Ditto the trend line on the weekly S&P chart at approximately 1460 which coincides with the February high (see the weekly chart in yesterday's column). The blow-off phase should be over on any break of 1460 and aforementioned trend line.

Speaking of the other side of records, May 17th is the anniversary of the NYSE. May has correlated with some significant market highs, and highs in years ending in '7.' On May 18th the DJIA scored its closing high for the move so far, closing at 13,557. The last four sessions have closed in the red. In fact, in the last five out of six sessions the DJIA has shown a loss. This is a change in character.

Five consecutive days down in the DJIA is many times a buy set-up – in a bull market. Some technician friends of mine tell me that the market is oversold – at least short term. But, not if the character of the market is changing. The most bullish thing a bull market can do is get over-bought and stay that way. And vice versa.

As Chauncey the gardener in the movie Being There said, "I like to watch." You can observe a lot by watching. So it will be important to observe the behavior here of a short-term oversold condition by the light of the moon of what happened in Asia last night. It is worth observing the behavior here at the mysterious Holy Grail to see if there is a change in character.

Perhaps this is just another stab down to the 20-day moving average, such as occurred on another Thursday, May 10th, where there was no downside follow-through. But, I understand there are some big bears who, tired of being squeezed and ridiculed, have covered everything at Thursday's close. After one big day down. That's the position the market has put the bears in.

Maybe this time is different. We'll see what happened on the other side of the earth Thursday night.
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