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A Moratorium on Momentum


As on Friday, in 1987 the market closed right on support on the Friday prior to Black Monday, so Monday will be a significant session.

Hello darkness, my old friend, I've come to talk with you again
Because a vision softly creeping, left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains within the sound of silence
Sound of Silence (Simon and Garfunkel)

Atlas may not have exactly shrugged last week, but he bowed a bit.

From 1576 S&P a week ago Thursday to 1500 in seven trading sessions. A doozy by any stretch of the imagination, Friday's anniversary of Black Monday, a near 400 point plunge in the DJIA, did not compare to the worst one-day percent decline in the market, but it certainly seemed to signify respect for the notion of market anniversary dates as espoused by W.D. Gann. Then again, of course, today is Monday and Friday wasn't. And, ironically Black Monday occurred the day after option expiration in 1987.

Of course, not all anniversary dates are created equal. As I offered in a recent column, last week was the anniversary of some major highs and lows in history. It was the low of the 1990 break. It was the low of the bear market in 2002. It was the anniversary of the 1998 sell-off low. And, of course, it was the anniversary of the week the great 1987 unwinding began.

Do cycles exist? Are anniversaries only important if you forget your spouses? What is the shape of time? Is there a periodicity to the human emotions of fear and greed?

Counting from this year's July 19 peak, the panic cycle of 49 to 55 days, which I have mentioned often in this space, culminated on September 12. The S&P stabbed down testing the right shoulder of an Inverted Head & Shoulders Pattern on September 10 and turned up sharply on September 11. In hindsight, when the index recaptured the 50% principle or the mid-point of the July/August range of 1463/1474 September 13 the S&P was speaking: it was the Fed Whisperer to the blitz that was to be unleashed by Ben on September 18, which saw the S&P explode from 1476 to 1520.

It is intriguing that, counting from this summer's panicky August 16 reversal low, this same panic cycle culminated on October 10. Why? Because, the all-time intraday high occurred on October 11.

So, it will be interesting to see if we get any follow-through below the 1500 strike on Monday or whether Free-Fall Friday was a tale told by an idiot signifying nothing but options expiration.

It will be potentially interesting if the pullback to the breakout point at 1500 S&P which coincides with the key 50 dma on the index snaps. That would suggest an intermediate change in trend. If 50% of the August to October range at approximately 1475 is snapped it will suggest an intermediate change in trend as well. If the low of Bernanke Tuesday on September 18 at 1477.65 S&P is violated, the market could panic as the Emperor will have no clothes.

Click here to enlarge.
A W on the weekly chart, B. Note the weekly trendline from the 2003 low, C, with support at approximately 1470, D, the low prior to the double Fed cut on 9/18.

If the September low of 1439.30 is violated this month the index will have traced out a bearish outside down month. If the level where the Quarterly Swing Chart last turned down at 1416 is violated, the S&P will issue a Time Turn Trend Sell Signal, which is the sign of the bear. If the August low of 1370.65 is violated in the fourth quarter this year the S&P will have traced out a very bearish outside quarter down and suggest a move to the lows of 2006.

When the W Bottom carved out in June snapped the market plunged. Is there a bigger, more potentially ominous W that is a fractal that now exist on the weekly chart of the S&P – namely the March and August bottoms this year?

Click here to enlarge.
When the W on the daily chart from June broke the S&P sold-off sharply. Is the W on the weekly chart, the March low and the August low, a fractal of the earlier pattern? Will a break of the Big W trigger an even steeper break?

If these bottoms break, it may make Free-Fall Friday look like a tiptoe through the tulips.

So far the bulls can lay claim to the notion that the recent set-back is no more than a pullback to the breakout point. Technically of course they are correct, except that I recall quite well that in 1987, the market closed right on support on the Friday prior to Black Monday. So Monday will be a significant session. Is there anyone that really believes that the market won't get worked, that it won't get saved? After all we've been conditioned to the idea of a "wolf shouting boy" every time the wheels come off. Every time the fat lady starts to sing and Boo pulls out a stogie, she gets yanked off the stage. Every time Boo thinks he sees the writing on the wall he learns the hard way that it was written in evaporating ink. A Dear Boo letter from Hank.

On Friday, the S&P skidded to the 150 SPYDER strike. It is intriguing that on the morning of misdirection Thursday seven sessions ago, someone big sold naked calls and bought puts to the tune of 35 thousand contracts. Usually, you don't get that big by being uninformed. So, as mentioned above, it will be extremely interesting to see if we in fact get follow-through below the 1500 strike on Monday.

The weight of the triangulation of time, price and pattern which in reality are one in the same pinpointed a top at the 1576 square on the anniversary of some historical highs and lows. This trinity of time, price and pattern are the spirit on the water of market movement. But, follow-through is the key to navigating. Consequently a break below the breakout pivot of 1500 that sticks will put the S&P in a weak position.

The secret to riches, like the secret to comedy, lies in timing. It is comical that some seem to be pinning the blame on Friday's deluge on the media coverage of the 1987 crash. It is especially comical since these are the same folks that suit up everyday as Hoofy's cheerleaders. It is also comical that some blame Free-Fall Friday on legendary investor Julian Robertson's comment about a forthcoming doozy of a recession. Is there really anyone on the Street who was not aware of Mr. Robertson's bearish view? Didn't he simply fit the bill for the "Bear du Jour" for the anniversary show?

Be that as it may, one of the most bearish things I saw on Friday was the behavior of Schlumberger, (SLB) which got slammed on silence – its earnings were fine from what I saw and it offered no sound of poor guidance. Other then Caterpillar, (CAT) which was given the distinction of being the Grim Reaper for Friday's drop, there was silence as to the real culprit for the plunge. Moreover, the King of the Hill, Google's (GOOG) earnings, could have been used by the bulls to offset CAT's dire straights. But it wasn't.

The buyers went on strike before the weekend. Whether they show up at support will echo volumes.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.
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