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All Quiet on the Market Front?


A break of the March low and the August 16th low would likely coincide with another shoe dropping in the credit closet.


And everything under the sun is in tune
But the sun is eclipsed by the moon.
-Eclipse (Pink Floyd)

The market usually gives a graceful exit. Usually, not always.

The snap-back rally into August 8 was such a graceful exit prior to a six day 126 point S&P plunge. That snap-back rally ran eight points shy of tagging the overhead 50 dma at that time.

So, here's the crucial question that should be on traders' minds today: is the S&P poised for a test towards the lows on a pullback or a new leg down?

Was Monday another graceful exit before another plunge which will mark the September as more devastating than early August? Did hope eclipse fear last week?

Will Monday turn out to have been a last exit for Brooklyn for hedge funds fleeing Manhattan before month end, before redemptions, before Labor Day?

There seems to be a consensus amongst traders I talk to that this week will be quiet, pre-holiday, non-event and that stocks will hold up into after Labor Day. When I hear that kind of glib analysis and rationale in the eye of a hurricane of uncertainty and volatility, it makes the hair on the back of my neck stand up.

Click here to enlarge.
On the seventh day, the market rested. A Necktie of the 200 & 20 dma's is first support near 1556. Failure below 1555 suggests a test of 1440ish.

Friday's rally marked the sixth day up from the August 16 reversal. On the seventh day, the 'curious bid', as Toddo calls it, rested. Like the rally into August 8, the recent move up came shy of its overhead 50 dma. This go-round the index was 15 points shy of tagging its 50 dma before running out of gas.

The S&P is exhibiting some symmetry in as much as the plunge into August 16 ran six days while the rally into last Friday ran six days: the mirror and the pendulum playing hide and seek.

There is good reason to be risk-averse of longs and aggressive on the short side over the next few days. Nothing works all the time, of course, but there is a good set-up here, which is powerful if it works.

The S&P closed at the extreme high of the day on Friday and at the extreme low of the day on Monday. Moreover, as a ten minute chart of the S&P shows, the run off in the index was quite week suggesting further pressure this morning.

Click here to enlarge.
A break of triple bottoms (A) on Monday's 10-minute chart on the Runoff suggests downside follow-through Tuesday morning. On recapturing 1476 can the S&P show potential to tag 1484, the monthly Swing Pivot (B)?

Often, this is the behavior at a turning point (even if only a short term one)---it is how those 'in the know' set-up their short sales and/or buy protection at a discount before pulling the plug. What is it those in the know know? We can only speculate as to whether the smart money is aware of a big fund being forced to liquidate because it is going out of business at the end of the month or whether the smart money is aware of a ream of redemptions overhanging.

Be that as it may with Monday's action, the S&P may have carved out a second lower high on the daily chart. And, of course, downtrends are defined by lower highs and lower lows. So this is an important crossroads technically, seasonally (September is the cruelest market month) and cyclically given some prior patterns addressed in this space.

Even in the most bullish of cases a test of sorts towards the August 16 low would be normal. A pullback towards support would be the normal expectation. Even after the low in March, this is the point in time when a pullback began.

Of course, there is a conspicuous difference between the current position of the market then and now.

In March, the first thrust off the low saw the S&P capture its rising 50 dma while the first pullback held the 20 dma. Now, however, the S&P is entrapped below its declining 50 dma.

However, potentially constructive, the S&P could make a stand (at least the first time around) at a necktie of its 200 and 20 dma's at 1455-1457.

If that level fails, stocks would head lower quickly.

It is important to remember that even if the market has put in a significant low on August 16 a two to three day pullback from here, especially after a six day 108 point S&P rally, is to be expected. The tipping point, the point of equilibrium to watch, is 50% of the range which equates to 1425. This lines up with the level of the first low on August 6 at 1427.40.

Will the S&P attempt to trace out a bullish inverted Head & Shoulders pattern with a continuing pullback carving out a right shoulder?

As you may recall, one of the reasons I suspected the possibility of an upside reversal after an early plunge on August 16 that would hold 1402 S&P on a closing basis was that 1402 is conjunct August 16. Simply put, 1402 and August 16 "square out": they are harmonics of each other according to the Square of 9 calculator.

I understand that this sounds like "voodoo technicals". Suffice to say that the proof is in the pudding.

That does not mean to imply that this works all the time. It does not. Set-ups are set-ups.

Unfortunately, the online Square of 9 chart (that I have shown in this space) does not extend out far enough on its number grid or I would show the 1402/August 16 square.

The large physical Square of 9 wheel I use in my office extends out far enough to see this harmonic.

Here's what's interesting: the price of 1479 is opposite or 180 degrees up from August 16. In other words the price of Friday's high squares the August 16th low.

The levels to watch if the market heads lower are 1455/1457 mentioned above. 90 degrees down from 1479 is 1440. An hourly chart shows solid support at 1440.

Click here to enlarge.

A break of 1402 (another 90 degrees down from 1440) would suggest another down leg is underway which would eclipse the March lows and the structure of the spring pattern in time and price. Such a divergence from a pattern low five months earlier was the point of recognition that something different was playing out in October 1987. The point of recognition was sharpened after a lunar eclipse in October 1987. I don't mean to overdo the parallels with that year, but it is what it is.

Better to be warned than eaten by the silence of the wolves. Today's Monday's turning point and today's eclipse may prove to be unimportant, but defense is the best offense when you've seen how the cycles can sneak up on you, when you've been through more than a few cyclic turns.

Curiously, a 360 degree move down from Friday's high gives the May 2006 high at 1327. Old tops becoming new support? A break of the March low and the August 16th low would likely coincide with another shoe dropping in the credit closet. It would blot out the bucks and bids that have attempted to build this city on rock and roll from Sgt. Boom Boom and his Lonely Hearts' Club Band... It was 240 months ago today.

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