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Price Drives the Market, Not Opinions

By's only the market's perception of what's going on that counts.

"Did you ever wake up to find
a day that broke up your mind,
destroyed your notion of circular time..."
Sway (The Rolling Stones)

Economics Teacher: In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone?... the Great Depression, passed the... Anyone? Anyone?... The Hawley-Smoot Tariff Act... Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression...
-Ferris Bueller

The art of war is based upon deception, the creation of false appearances to mystify and elude the enemy.
Sun Tzu

Battalions of bulls have told us over and over again how the market's ability to shrug off almost every conceivable concern and to shake off every piece of bad news was a sign of just how strong the bull market was and how much longer it had to run.

The irony is that this air of invincibility is self-perpetuating and that as management guru Peter Drucker stated, "Success always makes obsolete the very behavior that achieved it." Or to twist what Bob Dylan sang, there's no failure like success.

The news matters when the cycles break.

The bricks of concern, once stepping stones for Hoofy's run up the wall of worry, he is now pelted with. Hoofy, get a helmet.

There is no lack of experts with elegant rationalizations or opulent opinions regarding why the market is doing what it is doing and where it is going from here. However, the position of the market will be dictated and defined by one thing: price. Price is the final arbiter.

Forget about what he or she or you think; it's only the market's perception of what's going on that counts.

In trading, less is more. So, let's keep things simple and look at what price is saying and swaying.

A look at a monthly chart of the S&P below shows that on the 14th bar from the May 2006 top, (label D), the index reversed down, leaving an outside down month in July, 2007. The market often turns on seven and this is two periods of seven.

Click here to enlarge.

The top is often reflected by the bottom and the month of March 2003, where the advance began, was an outside month up.

It is interesting that July's outside month down is the fifth such downside reversal month since 2003, as the Elliott Wave structure plays out in five waves.

However, the important thing is that each outside down month since the March 2005 reversal signal (C) has traced out only two lower monthly lows. (see label D May 2006, and label E February 2007).

Will the S&P carve out a low in August in a parallel to these prior monthly reversals?
I suspect it is at least going to appear that way for a while as the Bull/Bear debate rages on into August, where it will likely be resolved before the end of the month.

Is the S&P mirroring the February/March shakeout? There are at least two notable distinctions: the February outside down month did not close below the low of the prior month, whereas July is a Key Reversal month because it closed below the June low. Secondly, the S&P is poised to undercut its 200 dma this morning, something the index did not do in March.

Click here to enlarge.

The high of the low bar month in the February/March decline was the March monthly high of 1438.90. This is an important level to watch going forward because the high of the low bar on any time frame often acts as support on a pullback in an ongoing advance.

This level is also important as 1440ish defines a monthly trendline up from 2006.

Because the 200 dma on the S&P is at 1449, we must consider that an undercut of the 200 dma that tags 1440-ish and then turns back up and recaptures the 200 dma to be constructive, at least for the short term. Such a scenario would carve out a three point trendline on the monthly chart, setting up a potential Rule of 4 Sell Signal going forward.

Additionally, 1440 represents a 270 degree move (three squares of 90 degrees) down from the 1556 high. So, this is a level worth watching on Wednesday. Judging by the action in the futures, 1440 could easily be hit on Wednesday.

Be that as it may, I heard of more than a few money managers buying as Goldman Sachs (GS) kissed its 200 dma much to their chagrin. It is the behavior at a key moving average, not the move to the average in and of itself, that counts.

Click here to enlarge.

Yesterday, I offered that the Monthly Swing Pivot at 1484.20, where the monthly chart turned down last Thursday, (see daily chart) would be initial resistance.

This coincides with the feet of big M (1484 to 1487 planted in June). On Tuesday, the S&P spiked up to 1488.30 before collapsing over 30 points late in the session. Voodoo Technicals? Reasons? Anyone? Anyone?

Such is the power of the Swing Chart Method.

If the S&P should accelerate lower this week the critical level to look for is 1416.35, which is the 2Q low scored on April 2 and 1401, which is 360 degrees down from the July high.

Tuesday's intense reversal comes as both the hourly and ten minute charts trace out what I have identified as a Power Surge Pattern, a third lower high.

Click here to enlarge.

Third lower highs can lead to waterfall declines, so heads up about trying to catch a falling dagger. Wait for some sign of stabilization. The plains are littered with the bodies of heroes.

Note how Goldman and American Home Mortgage (AHM) both show waterfall declines from third lower highs.

Two other stocks of interest in Tuesday's action were Apple (AAPL) and Mastercard (MA).

AAPL has been the bellweather for this advance since bottoming at 50 last July. I have identified 145 as a major square out.

Despite the company's tremendous earnings and the successful release of its iPhone, AAPL has sold off heavily from 145. The huge volume on July 26, when AAPL closed at 146, suggests the stock has flamed out for the time being.

Click here to enlarge.

MA, another go-to momentum name, was up six points early Tuesday before reversing to close down nearly four in front of earnings this morning. A gap down may well be a mirror image for back of the upside gap on the last earnings release in May, as 169/170 looks like an important square out.

Click here to enlarge.

Conclusion: The cat and mouse game of jacking the market up to create bids for a big fund that may be going belly up and forced to liquidate into month end may have played out near term.

Tuesday's month end selling was reminiscent of Friday's late selling storm.

Click here to enlarge.

If that was one of the culprits and the S&P undercuts its 200 dma near the open today, a possible short term trading low may play out.

However, it is a fast, fast market in a vulnerable position that could just as easily go off the cliff if the index does not recapture its 200 dma and does not make a first-hour low.
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No positions in stocks mentioned.

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