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'Round the Equity Bend


Hoofy got caught with his trousers down around his ankles on Monday as the market rounded the bend into month's end.


Driving that train, high on cocaine,
Casey Jones is ready, watch your speed.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.

Trouble with you is the trouble with me,
Got two good eyes but you still don't see.
Come round the bend, you know it's the end,
The fireman screams and the engine just gleams...

--Grateful Dead (Casey Jones)

Speaking of love in an elevator, Hoofy got caught with his trousers down around his ankles on Monday as the market rounded the bend into month's end. What's this, window undressing?

Of course, the market is entitled to pull back. The question is, how do you differentiate a garden variety pull back from something potentially more diabolical. There are some flies in the ointment which suggest that Monday's decline may be something more then pure profit taking.

  • We are in the period when normally the market goes up the last few days of the month and the first few days of the beginning of the new month. This is a change in character. As indicated above the month ended with more a window undressing than a window dressing.

  • I mentioned in Monday's column that many times buying climaxes (and selling climaxes) and significant turns occur on the seventh bar. Monday was the first day of the seventh week up from the March low.

  • Last week I showed a Square of Nine Calculator (The Wheel of Time and Price) indicating the importance of 1498 S&P as this level is in opposition to the 768 October 2002 low. If, as W.D. Gann said, all highs and lows are related, then the Law of Vibration dominates market movement and the reversal from 1498 may be notable. That 1498 level was kissed last Thursday. The S&P closed at 1482.35 on Monday down 11.70 points. This happens to represent the largest one day pullback this month.

  • If advances end in a bang rather than a whimper, than the advance in April may represent a climactic, exhaustion phase with Monday's action the exclamation point on April's climax run.

  • Be that as it may, however significant the move to 1498 plays out in the fullness of history, one thing can be said which is that runaway moves typically do not pause for more than two to three days before resuming their underlying runaway. Consequently, if the market doesn't reverse Monday's losses immediately, then, at the very least, the expectation would be that a correction phase is underway.

  • The April runaway advance saw the DJIA rise 19 out of 21 sessions. That kind of stretch is as rare as hen's teeth. I believe the last two occurrences were 1927 when there was a real estate crash in Florida and then again in 1929. Whatever the current big-picture position of the market, the recent stretch in the market certainly represents an aggressive exposure to the market by the big money engineering this ride.

Was Monday just another day of selling - just a day of profit taking? Perhaps, but a few monkey wrenches were tossed at Hoofy on Monday.

  • If Goldman Sachs (GS) is the big tell, then it is a big tell that GS knifed below its February high of 220-222. GS was down 5.67 to 218.61 on Monday.

  • Likewise, there were more than a few Train Tracks, or what I refer to as Expansion Range Double Sticks Sell Signals on Monday. For example Mastercard (MA) broke out of a line formation on Friday (mentioned on the Buzz last week) after volatility coiled for six to seven weeks. However, MA gapped open on Monday but reversed leaving a long tail and Train Tracks on volume as well as on price. A move back below recent lows on MA will trigger a Volatility Pendulum Sell Signal.

  • Train Tracks were also left on momentum stocks Deckers Outdoor (DECK) and Equinix (EQIX) –just to mention two.

So was Monday just a breather--a down day that the indices were thoroughly entitled to? Perhaps, but methinks something more sinister could be playing out. For example, RUT (the Russell 2000 Index) convincingly dove below its February 22 high of 830 closing at 814.54 on Monday. The NAZ is flirting with a similar break. On the S&P 500 a potential Cascade Pattern sets-up:

  • In a previous column I mentioned the measured move in the S&P which projected to 1484. The S&P lost that level on a closing basis on Monday.

    The Maginot Line for the bull case is the 20 DMA at approximately 1463 S&P which is roughly coincides with the February high (A).

  • The Weekly S&P Swing Chart will turndown on trade below last week's low of 1473.75.

  • If the index does not find support on a break of 1473.75, it suggests a quick test of 1461 which was the February high.

Finally, there is another piece of symmetry worth noting on the Weekly S&P Chart, which suggests that a mirror-image fold-back may be carved out. To wit, the current six week run-up appears to be a mirror image of the sharp six week slide into last June. If so, we are at point A on the chart below and the index will trend lower (see arrow).

Moreover, there is an old adage, "As above, so below" which along with the other technical tidbits above indicate that the move to 1498 may have satisfied a test of the 1527 S&P all-time closing high in March 2000. Confirmation of such a pattern would come if the S&P relinquishes 1460.

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Positions in MA, DECK, EQIX

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