For Whom the Bull Tolls
They say they don't ring a bell at the top of a market. However, sometimes you need to listen to history with dog ears.
My Prussian-blue electric clock's alarm bell rings, it will not stop
And I can see no end in sight and search in vain by candlelight
For some long road that goes nowhere for some signpost that is not there.
--Shine On Brightly (Procol Harum)
"How little we know of what there is to know"
--Ernest Hemmingway (For Whom The Bell Tolls)
But all the clocks in the city
Began to whir and chime:
"O let not Time deceive you
You cannot conquer Time."
In the burrows of the Nightmare
Where Justice naked is,
Time watches from the shadow
And coughs when you would kiss.
--W.H. Auden (As I Walked Out One Evening)
What has been will be again, what has been done will be done again.
They say they don't ring a bell at the top of a market. However, sometimes you need to listen to history with dog ears.
At the end of the first week of June I wrote a piece called A Pivotal Set Up Worth Watching.
Now, at the beginning of the first week of July, it is a good time to further flesh out the bones of that set up.
To review, the average time for a blowoff is ninety calendar days (sometimes extending to four months). Since the closing low for the year occurred on March 5th and the intra day low occurred on March 14th, that translates to an approximate window between June 5th and July 5th on the one hand and June 15th to July 15th on the other for a peak.
So far, the closing high for the advance off the June 2006 low has been 1539.20 seen on June 4th 2007.
Since June 4th volatility has expanded and momentum has ebbed with the S&P showing a loss for the month, albeit marginal loss of 27 points or just under 2%.
There are two ways in which the market walks off an overbought condition---either by selling off or going sideways. The big question going into the second half of the year is whether the market will once again flex its muscle and surge again after this pause. Does the market have a repeat explosive performance ahead in the second half or will money managers find themselves in a position of having to liquidate to protect first half profits?
For me, the answer to the question is largely one of time, price and pattern. Has the S&P carved out a potentially bullish W formation, a fractal of the March correction, or is it tracing out an M top? In a nutshell, is the S&P consolidating in an accumulation phase prior to another leg up or is the index undergoing distribution?
The thing about so called W bottoms and M tops is that more often than not they actually take the shape of W V bottoms and M A tops. Hence, the old trader's saw of three drives to a high and three drives to a low.
A good example of three drives to a low is seen in the monthly chart of the S&P into the July 2002 capitulation low.
Note how the July 2002 low, the October 2002 low and the March 11, 2003 low carved out a W V bottom.
So where does that put the S&P currently? On June 1st the S&P made an intraday high of 1540.55 for the advance that began on March 12th 2003. This marks an important 'square out' as June 1st 2007 is 1540 days from March 12, 2003. The S&P has yet to exceed this time and price 'square out.'
Many times a market will undercut a major low before the trend reverses. Such was the case at the October 2002 low which incrementally undercut the July 2002 low. Likewise, many times a market will overthrow a prior significant high before reversing lower in earnest. Such was the case with the January 1973 'breakout' for example. This is one of the reasons throughout the current choppiness that I have not discounted the possibility for a move above the 1552 S&P all time March 2000 high. That combined with the idea that time was not up and that the S&P had not yet confirmed a bona fide change in trend.
It is important to allow for the possibility of the A of an M A top to play out which would potentially offer a picture perfect square out into early to mid July. But time is running out.
In addition to the above time and pattern considerations, the first week of July will square the price low of the October 2002 bear market low. The idealized price for such a square out would have been 1576 as July 4th squares 1576 which is six full squares up from the 768 October, 2002 low. That seems highly unlikely to occur this week.
I am no Elliottician, but I do subscribe to the notion that the markets play out in three phases with two intervening corrections. With that said, counting from this year's March low, it appears the promise of a fifth and final wave has been blowing in the wind. The monthly chart and weekly chart show in fact that the S&P may be near a point of culmination if it has not already reached it. Although there are potential price targets as high as 1576 to 1590, W.D. Gann stated that when it comes to analyzing the markets, time is more important than price. The market has its own internal clock: when time is up, it is up.
If the S&P has already peaked, leaving what may be a fifth wave failure, and a failure to culminate picture perfect symmetry, it represents that much more of a potentially bearish slant. Is it possible that the CDO issue at Bear Stearns (BSC) has diverted the S&P from a date with destiny in the way of higher prices, when the market has shrugged off every and all other concerns over the last few years? Perhaps, if time is up.
Does the S&P have to overthrow the old high of 1552 in order to allow the smart money to establish short positions while the public comes running in euphoric at the 'breakout'? It is worth mentioning that the DJIA did not undercut its 1980 low in forming the big 1982 bottom. It is worth mentioning that the DJIA has eclipsed its first quarter 2000 peak even though the S&P has not. While the S&P may be the best measure of the market, the DJIA is probably the best pure psychological measure of the market. So we have a split decision.
Could the stock market see an historic sell off in 2007. Such was the case in other years ending in seven. Fifty years ago in 1957 saw a waterfall decline in the second half. One hundred years ago in 1907 saw a waterfall decline in the second half. Seventy years ago in 1937 saw a waterfall decline in the second half. Twenty years ago in 1987 saw a waterfall decline in the second half.
A) A March 14th high (a mirror image to this year)
B) By mid-August the DJIA is in a Waterfall Decline.
The bull market is overbought in time although not necessarily in price. In terms of time the length of the current bull market is approximately four years eight months long. This ranks in the top five of longevity of all bull markets. However, in terms of percentage gain, at approximately 100%, this is not an elite bull run. This relatively unstellar gain over such a long period may speak to an underlying weakness in the bull market. It may address the old saw that markets usually (not always) give a graceful exit. What this bull market has lacked in the way of percentage gains it has made up for in persistency. This underlying persistency and failure in the indices to offer over a ten percent correction for years has created beaucoup complacency and allowed individual leaders to skyrocket. There are no lack of parabolic names.
The round trip by the S&P to within one percent of its 2000 high seven years later maybe such a graceful exit by the Buy and Holders who never sold.
Earlier, I mentioned the M A top. Seventeen years ago in 1990, the S&P made a high on Friday, July 13th. There were M A tops on the daily, weekly, and monthly charts.
Has the S&P traced out a 5th Wave Failure or is another fling ahead?
After going sideways for most of 2005, the S&P broke out in November 2005. Did this begin the 1st drive up of 3-Drives on the weeklies into 2007?
I remember 1990 well because I was very bearish a few months before the high and had shorted early without waiting for clear cut confirmation of a change in trend.
A few months before the top I had finished reading a book about the secret trading method of W. D. Gann. At the end of the book, it stated that that an age or an eon was 22,228 years. I thought the specificity of the number interesting as I had always heard that an age was related to the procession of the equinoxes and was between 24,000 and 25,000 years.
Playing around, I divided 22,228 by 360 (for a cycle) and got an interesting number, 61.8 years or a fractal of the Fibbonacci ratio of 0.618. This was close to what was thought to be the Kondratief Wave as well as W.D. Gann's Great Cycle of sixty years as well as the Mayan calendar component of sixty.
For some reason I decided o calculate 22,228 days (a day for a year) from the infamous September 3rd,1929 top (I said I was bearish at the time). The result was July 13, 1990. July 13th 2007 is also a Friday as it turns out.
"Was July 1990 destined to be a false breakout of the 1987 top?" I thought to myself at the time and augur in a bear market on the 60 year cycle from 1929?
After a correction in the spring and "W" Bottom (A), the S&P exploded in a 90-Day blow-off into late August (B). Bulls saw another "W" formation in the works (C) but a Waterfall ensued instead (D).
Only now in hindsight, can we look back and see that Japan actually mirrored the top the U.S. market made in 1929 as the Nikkei scored a top at the end of 1989 which it has yet to recover.
There is a link cyclically between the 1929 top and the 1990 top. What does this have to do with the health of the market in 2007, seventeen years later?
Is there a seventeen year cycle? From the historic 1932 low seventeen years later gives 1949 and the beginning of what is referred to as The Great Bull. Seventeen years later is 1966 and the top of the Go-Go Sixties market.
Seventeen years from the 1973 false breakout in the DJIA was the 1990 top. Here we are seventeen years later.
After a sharp break in the 1st quarter (A) the S&P rose persistently into July 13, 1990 (B) followed by a Waterfall Decline (C)
Seventeen years from the summer of 1982 an the beginning of the mother of all bull markets was the summer of 1999 when the DJIA topped out and doubled topped in January of 2000.
Actually, the seventeen year cycle is known as the Cicada Cycle (as in locusts in the Biblical sense). When you divide this seventeen year cycle by four (as in four seasons) you get 4.3 years. which lines up with the famous four year cycle.
Interestingly, we are 4.3 years from March 12, 2003.
A look at a chart of 1957 or fifty years ago shows a remarkable parallel to the current year. It shows a break to a February low that is reminiscent of this years break into March followed by a straight line run. At the end of June, 1957, the DJIA traced out a double bottom just below the 500 level (1500 S&P?) and drove approximately 5% higher for the A of an M A top.
50 years ago the S&P declined into a 1st quarter low and rose persistently into mid-July (B) is that an "MA" Top? The 2nd half saw a Waterfall Decline (C).
A 5% move higher from here would equate to approximately 1570 S&P. On the square of 9 calculator, at 1576 the S&P would be six squares of 360 degrees from the October 2002 low of 768.
Fifty years earlier in 1907, as the weekly chart seen here shows, the DJIA began a waterfall decline in July known as the Rich Man's Panic. After seven squared years or 49 years, comes the sabbatical year of rest.
According to W.D. Gann, the 60 year cycle was The Great Cycle. It is the time period. It took six days to create the universe and 60 six day periods is a circle or year. Sixty seconds is a minute, sixty minutes is an hour. At a time when terrorism is back on the front pages, it is fascinating that 60 years ago (in 1947) on the seventh day of the seventh month, European Jews boarded a ship called Exodus to land in Israel. For all intents and purposes this was the beginning of the state of Israel formally chartered in 1948.
Sixty years after Hitler (Aryan nation) failed in his attempt to acquire the atom bomb, and the first atom bomb was detonated, another religious fanatic (Iranian nation) took power and is seeking to acquire nuclear power for 'peaceful purposes.' Both rulers came to power when they were forty nine years old. Both had the common goal of wiping out the Jews.
60 year cycle? It was in 1600 BC that the Jews fled Egypt. The current time period is 3600 years or 60 times 60 years later. When you consider that the Palestinian/ Israeli issue is the 'excuse' for much of the terrorism in the world, the current civil war amongst the Palestinians and the Iranian proxy Hamas and the launching of thousands of bombs into Israel one year ago, geopolitical concerns become potentially magnified market moving events.
Is it just happenstance that 60 years prior to the 9/11 sneak attack in 2001, that another sneak attack occurred at Pearl Harbor?
Recently, some famous Bears have thrown in the towel, embracing the idea of a magnificent third phase of a bull market that sucks the public in and launches global markets:
1) From where most of us sit, emerging markets HAVE seen explosive moves.
2) There were 11,000 attendees at the recent Money Show in Las Vegas. That doesn't sound like disinterest to me.
3) If in fact you believe in the idea that bull markets play out in three phases, from where I sit they may have played out. It looks to me like there was a 60 month phase from 1982 to 1987, a second 60 month phase from 1995 to 2000, and a third phase which began in July 2002. Here we are sixty months later.
Time, Price and Pattern. You bets your money an you takes your chances. However, nice to have an edge in defining the risk and handicapping the odds.
Will the seventh month of 2007 mark the peak from which the second half will see a waterfall decline?
Will the S&P see a Matterhorn Move back to the area of the last low in June of 2006 in a mirror image cyclicality of the first leg explosive 25% rally off the July 2002 low?
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