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Blame Game Ignores Historical Patterns


Although it may look like the market is doing some kind of ragged impromptu reggae, the price action has been textbook.

I went down to he crossroads fell down on my knees
Down to the crossroads, fell down on my knees
Asked the Lord above for mercy, "Save me if you please."
-Crossroads (Robert Johnson)

Blame it on Rio: they blamed the drop on everything else but on Tuesday.

All the usual suspects were blamed for Tuesday's meltdown: the FOMC minutes made Rosie Scenario tremble, the cancerous Case/Schilling housing numbers left Goldilocks gilded on the lily (or is that tulip?), Mother Merrill spanked the other little piggies with a downright timely downgrade and consumer sentiment, in a word, sucked.

Tuesday's hatchet job was blamed on everything but voodoo and a lunar eclipse. It might just as well have been voodoo: from where I sit the market's been doing a superb imitation of A Weekend at Bernie's. Given the stiff winds leaving the housing bubble, the debt bubble, the quant bubble, the derivative bubble and the yen carry bubble, it's a wonder Bernie can be propped up at all.

It will be interesting to see what Bernie and the Jets (Sgt. Boom Boom and the Lonely Hearts Club Working Group) do in the way of intervention over the next few weeks. Will there be another meltdown of sorts by Teletubbies trying to needle the Boyz in the Band to rescue the market? Or will the market be disappointed by its perception that once again The Lone Ranger will ride to the rescue with a silver bullet, allowing yet another bubble to be blown?

And that's precisely what you get when you don't allow excesses to be expunged, when you try to repeal the natural ebb and flow of cycles. But, then again, the market seems to have its own innate order, its own internal clock.

Although it may look like the market is doing some kind of ragged impromptu reggae, the price action has been textbook. The price levels have remarkably conformed well to an underlying symmetry as offered in this space.

For example, the pattern of 1987 looms large. It was this point in the pattern that year when a lunar eclipse coincided with all hell breaking loose over the next two weeks. It's anyone's guess what will be in store two weeks from now on September 11 and a solar eclipse.

Symmetry? The first leg down from 1556 to 1427 S&P ran 129 points. The second leg down from 1504 to 1371 ran 133 points. A symmetrical third leg down from last Friday's 1479 high projects to approximately 1350.

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Will the market find a textbook pullback low two to three days down from last Friday's high or will the market accelerate in a third leg down? Wednesday is a make or break day for the bulls.

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Why? Although the S&P accelerated lower on Tuesday when it snapped a necktie of its 200 and 20 dmas as well as a band of hourly support at 1440ish, as identified in yesterday's column, the crucial test for the index will be a cluster between 1425 and 1430.

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50% of the most recent range is 1425. The Weekly Swing Chart will turn back down on any violation of last week's lows, which was 1430.55.

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The first leg down into August 6 bottomed at 1427.40 while the closing low of the first leg down was on August 3 at 1433.05. The market has a memory. It recognizes this level.

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A break of the 1425 point of equilibrium and a turn down of the weekly chart that sticks suggests we are in the middle of a new leg down. An up open this morning is not what the doctor ordered for the bulls but an intervening two day bounce that plays out ahead of a long weekend at Bernie's is certainly possible. However, 90 degrees down from last Friday's high is 1440 and the prior band of hourly support which should no act as resistance. The important thing to remember there is extreme risk at this stage of the pattern, so caveat emptor.
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