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Trend Day Down?


Look for a break below first half-hour low that holds.


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There was a lot of talk mid-week about how the recent attempted rally fizzled. What got technicians bearish was the break of a rising channel since the July 15th lows. But as I like to say, it is not the break of a trendline or a channel in and of itself that is bearish (or bullish as the case may be) but the ensuing behavior after the break. There are many false pokes above and below trendlines that flush traders out at just the wrong time.

Be that as it may, the S&P held once again in the neighborhood of our old friend 1260 S&P before rebounding sharply to 1293 and closing near the high of the week and the high of the session on Friday.

For all the talk of a failed and fizzling rally, checking the weekly chart of the S&P shows that the index closed near the high of the week's range.

Click to enlarge

In fact, the index has now closed near the 1291 pivot for the last three consecutive weeks: on the week ending August 8th the S&P closed at 1296.30, on the week ending August 15th the index closed at1298.19 while last week the index settled at 1292.19.The market has a memory: 1291 resonates off the important May 18th S&P high.

While the broad market recovery last week may console traders, I would not take too much comfort from it in this most erratic of markets. Why? The hourly chart of he S&P shown below shows that the S&P has kissed the upper end of a short term channel and that another visit to 1260 may play out early this week, perhaps as early as Monday if momentum picks up.

In addition, as the 10 minute chart in the Friday night report showed, the S&P has traced out a potential ultra-short-term bearish 1-2-3 swing to a test of Friday mornings highs. Although Friday looked good, in fact, despite an extension of oil prices lower throughout the session, the S&P made a first hour high.

In short, the day was pretty much over after the first hour, which is not all that atypical of Fridays in the summer. Moreover, studying the daily chart of the S&P we see that after last Monday's 'channel break,' the index may simply be snapping back for a back test of the underbelly of that same channel.

Keep in mind that as the same daily chart shows the S&P broke out over a downtrend line on August 8th and last week's lows were a back test of that trendline.

It seems clear that trade below last week's low put the market in a weak position while any rally over the ensuing weeks that tags the upper end of the current channel near 1320 to 1350ish must be watched like a hawk for any signs of failure. Any failure from the 1320 to 1350 level and the 12,000 vicinity in the DJIA could usher in a swift decline. If that occurs I would expect a low sometime in November which is 14 months from the October 2007 high. 7 months from the October 2007 high was May which proved to be a significant high.

Consequently, if the market is in fact magnetized to a cyclic low in November it would carve out a high to high to low pattern.

Conclusion: The price action suggests the potential for a trend day down on Monday, perhaps a major trend day down. If we get an opening range breakdown, a break below the first half hour low that holds, I would respect it as the S&P could slip all the way back to the low 1260's without derailing the notion of a move above 1300 in the near future.

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