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Mirrors on the Ceiling


Lately trying to figure out this puzzle has been like looking at patterns through mirrors on the ceiling with a head full of pink champagne.


Mirrors on the ceiling,
The pink champagne on ice
And she said, "We are all just prisoners here, of our own device."
And in the Master's chambers
They gathered for the feast
They stab it with their steely knives,
But they just can't kill the beast.

Last thing I remember, I was
Running for the door,
I had to find the passage back
To the place I was before
"Relax", said the night man, we are programmed to receive
You can check out you any time you want, but you can never leave!

-Eagles (Hotel California)

Doing the samba on his way out of the exchange Thursday, Boo was overheard saying, "And another thing – there's yer third Cha."

Rumor has it Boo was on his way to a hot date Thursday night with some emerging market ETF gals – in particular a Brazilian who's going to teach him the horizontal samba.

Of course, the Cha Boo is referring to is the FOMC Cha-cha-cha Pattern. On the afternoon of a Fed Day, the market has shown a remarkable tendency to do a little dance – a step down, a larger step up, and then a third step down (or vice a versa) which is almost always the true directional bias. And sometimes meaningfully so.

As mentioned in yesterday's column, the third Cha went MIA on Wednesday. Well, it showed up on Thursday. In spades. Whether Thursday's downside pirouette is just that, or whether it is the beginning of a larger chorus line of selling remains to be seen. Follow through, of course, is always key. One day doesn't a trend make, nor does a coupla weeks necessarily a trend break (as in the case of the February/March squall), but there are some things, which may illuminate whether we are dealing with a continued feast or beast.

It's the nature of the human brain to uncover patterns and trends. And there are a few things worth mentioning in putting the pieces together that may reflect on the significance of the recent price action if we get follow through. Even though lately trying to figure out this puzzle has been like looking at patterns through mirrors on the ceiling with a head full of pink champagne. Normal technical expectations have been reversed, upended, and their edges blurred. Up until Thursday, that is.

If it is the nature of the human mind to seek symmetry and hunt out underlying harmonics, then the following that were worth mentioning before the fact may be worth repeating.

  • On the Buzz and Banter on May 8th, I wrote the following: There's value in the scroll.

  • The S&P chart below shows Thursday's action triggered a Triangle Pendulum sell signal, mentioned yesterday. As downside momentum picked up on a break of the post Fed dip level on Wednesday (approximately 1506), accelerated on a break of a daily trend line (at approximately 1500) and traced out from the March low, the writing was on the wall.

  • The break of these key short-term levels had the Bulls running for the door in the last hour as all rally attempts throughout the day were thwarted. It became clear that the market was going to close on its lows. And so it did. The S&P closed off 21.15 points, its low of the day, at 1491.45, just above its 20-day moving average, scoring its largest loss in two months.

  • The 20-day moving average looms large in its legend. It is often called the Holy Grail of trading. This is because in Bull trends, pull-backs to a 20-day moving average many times offers good support and and defines a good entry point. Then, of course, there are failures of the 20-day moving average. And, as you know, failed set-ups often trigger fast moves. Such was the case as on February 27th when the S&P plowed through its 20-day moving average and never looked back. It is interesting to note how the S&P recaptured its 20-day moving average convincingly on March 21st. The die was cast for a further advance when the index found support on a pullback to its 20-day moving average on March 30th.

  • Worth watching – the 20-day moving average of the S&P on Friday, which is just below Thursday's close.

  • The break at the end of February came as a three-point trend line from early January was violated. Although the angle of that broken trend line in February was not steep, it generated some of the most intense selling ever recorded, based on many technical measures. The slope of the current trend line, broken on Thursday, is much more severe. I don't know what this implies, but I don't think it's good.

A few thoughts flicker into the frontal lobe as to the current picture going into the weekend:

  • February/March was a "crash," but the market never crashes directly off a high. The market typically never crashes without prior distribution. Crashes occur when there is a break, and there is a return to test the highs and then a violation of the prior low. This was not the case in February/March.

  • The market usually (not always) offers a graceful exit. Clearly the move to yesterday's 1511 S&P high seems much more than a test of February's 1461 high. It certainly seems like more than a graceful exit. If an exit – it could only be characterized as a stupendously generous one.

  • However, it may be fair to say that the move to this week's high did satisfy a test of the March 2000,1527 S&P closing high.

  • It may be fair to say that this week's high satisfied a Flush and Squeeze play – where a lotta shorts checked in on the bounce from the March low, and a lotta Bulls checked out on the same bounce. Consequently, on the breakout from new highs on April 16th, the last three weeks squeezed the shorts and found under-invested Bulls chasing performance.

But, as we remember, seven is the number of reversal and panic. Thursday was the seventh day from the last swing low on May 1st. Last week, as you know, was the seventh week up without the market exhaling.

Conclusion: The low of the Weekly Swing Chart at 1476.70 beckons. If we get there, because it's a Friday, and because the weekly chart will have carved out a long tail (from this week's probe to new highs, but a substantially lower close – so far), the normal expectation would be for a bounce. However, ahead of the weekend, if there is downside follow-through after the first hour on Friday, the concierge may move Mr. Market to Room 1461.

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