Will Bulls Find Salvation?
Since mid-July, there's no denying that it has been murder in the market.
"Ooh, see the fire is sweepin'
Our very street today
Burns like a red coal carpet
Mad dog's lost its way..."
-Gimme Shelter (The Rolling Stones)
In just over a month the market has gone from an affable Ed McMahon's introduction of "Heeeerrre's Johnny!" to Jack Nicholson's version in The Shining.
A short month ago I suggested that if the patterns and cycles carved out a July peak as anticipated, we could see (like the mirror image of the words RED RUM scrawled in a mirror in The Shining) a mirror image fold back from the July 2002 period. From the Capitulation Waterfall Sell-Off into the third week of July 2002, the S&P exploded approximately 25%, or 186 points in a month. Since mid-July, there's no denying that it has been murder in the market.
I offered up that the geometry of an equal and opposite 25% decline now, which equates to 391 points from July 2007, would take the S&P back to 1165. There is some compelling symmetry to suggest that the geometry indicates the plausibility of such a sell-off:
- A look at a weekly chart of the S&P shows that after remaining range-bound for much of 2005, the index exploded from a low of 1168 in October 2005. Many times when parabolic moves unwind, they go all the way back to their starting point - or in this case 1168.
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- The freefall capitulation into July 2002 began in April 2002 off a high that March at 1174 S&P. The freefall bottomed at 776 in July, encompassing a drop of 398 points. A 398 point sell-off from this year's July high of 1556 equates to 1158. Got symmetry? You can't make this stuff up, folks.
- The S&P is currently off 91 points in five days – the worse such five day decline since – you guessed it, July 2002. The parallel builds.
- The twenty-five percent snapback thrust off the July 2002 low ran 186 points. Because the market is in a freefall phase, it is interesting that 186 points off the S&P 1556 high equates to 1370. This level virtually coincides with this year's low of 1364. That was the low of the vicious February/March shakeout.
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A measured move of another 129 points (A) equates to 1375. 1375 closely coincides with 1388 (360 degrees down) and this year's 1364 low.
- It is note worthy that 1388 S&P equates to a 360 degree move down from the "Orthodox" June high of 1541. I call that the orthodox high because the July 1556 high was a fake-out, break-out.
- The market has a memory. Besides the fact that 1387 is the close of the low bar day this year, the geometry of this level is further "proved" in as much as 1388 is also the mid-point of the range from the 2006 low to the 2007 high.
As long as we're talking about the geometry of the market, it is worth repeating a projection made a few months ago zeroing in once again on this 1160 level of the S&P – 50% of the whole bull/bear range from a low of 787 in 2002 to 1556 in 2007 equates to, yes, 1163.
Markets seek equilibrium. If the mid-point of the 2006 to 2007 range of 1388 snaps, the pull of the 1160 symmetry may magnetize the S&P lower.
That does not mean the index will be there tomorrow or next week. But, it does not mean it won't be there in September.
The market attempted to rally twice on Wednesday. Potentially constructive, the S&P regained 1435 (see yesterday's 10-minute chart). However, apparently redemption notices flooded in by the 1 to 2pm cut-off time. These notices are due forty-five days before the end of the quarter.
In Wednesday's rally attempt, the S&P found resistance at 1440 which, as you'll recall, is the high of the low-bar month of March. Bearishly, what should be support is now acting as resistance, a mirror image change in character.
The last hour waterfall in the S&P is a fractal of the last five days. In the same way the market shrugged off recent interventions and continued lower, you have to wonder if this behavior is a microcosm of what might occur if the Fed cuts rates. The point of recognition that the Fed may be pushing on a string, the recognition that the market may be gesturing to take the Greenspan Put and put it where the moon don't shine, could see those who have sown bubbles reap the whirlwind.
You have no idea how many times a day I speak to people who say "The Fed is going to cut tomorrow, the Fed will save us, this is just like 1998." Well, this is not 1998. Unfortunately, this is not an issue of liquidity and credit. It is an issue of leverage, severe excess leverage.
Simply put, excess leverage is de-leveraging. The risk managers, the risk doctors, have taken the reins from the speculators and the machine boys that ran amuck. Their agenda is pure and simple: to sell down to the sleep point, to preserve powder to live to play another day. In a word, their mission is survival. Moreover, the current problem is many, many, many times bigger then 1998. That was focused on one fiasco. This is a domino of debacles. It is larger then 1998. Many firms face the precipice and are on the brink. All of sudden the thesis that spreading risk over a broader spectrum would ensure that there would be no shock to the system holds no merit: markets are trapped in a global viral spiral.
On Wednesday, the Quarterly Swing Chart on the S&P turned down on trade below April's low. Under normal circumstances, the normal expectation, even in a bear market, would be a knee-jerk reflex rally. This is not a normal market. These are not normal circumstances. The failure of such a knee-jerk rally projects further downside acceleration, likely to 1388.
Be that as it may, it is important to note that 360 degrees down from the 1556 high is 1402 S&P. It is fascinating that 1556 and 1402 are conjunct with the dates of August 16.
Consequently, the possibility of a square-out or a short-term low exists today. Perhaps, just perhaps, the S&P drives down to 1388 and recovers 1402 prior to the close. It is also notable that 90 degrees up from this year's 1364 low is also 1402.
Redemption notices hit on Wednesday, but it remains to be seen if the bulls will get faith on Thursday: redemption is a singularly unreligious word on the street. As W.D. Gann said, "God geometrizes". But the Devil is in the details.
If there is no salvation on Thursday gimme shelter.
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