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Time, Price, and Pattern on the S&P 500: The Message of the Monthly Chart

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Bulls have been rewarded for buying every dip, but are they about to hit the wall?

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Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and nightly day and swing trading picks, click here.

Tooth for tooth eye for an eye
Sell your soul just to buy buy buy

-- "Crossfire" (Shannon, Layton, Wynans)

The tape action yesterday played out to expectations -- up to the last half hour when someone let the dogs out.

I'm sure that John and Jane Retail looked at each other with 30 minutes to go in the day and decided they just had to buy with the market at the lows of the day.

That being said, note the increase in volume on the 10-minute (SPY) just before the explosion off the low of the session.



This will embolden the bulls who have been well-rewarded for buying every dip as they disabuse the Street of the notion that discretion is the better part of valor in a stretched-out market.

For the bears' part, they're used to getting slapped around as the market has come back from serious setbacks in the summer of 2010 and 2011 like Wylie E. Equity off a Debt Cliff. It will be interesting to see what happens to psychology from a break into Complacency Chasm as crashes don't occur from irrational exuberance but from excessive complacency.

I say stretched out because since December 19, the S&P has not shown more than one to two days against the trend. While this is the hallmark of momentum moves, a rubber band stretched beyond a point will snap back in your face -- no matter how slow the stretch.

Sentiment levels are above those of the October 2007 all-time highs while the S&P is 200 points below those levels: Is that a bearish divergence, or does it suggest that if there is this much bullishness below the all-time highs, that the market has room to run?

My view is that market participants speak their book, and high levels of bullishness imply that those that want to buy have bought for the most part.

Current levels square out many highs in recent history and there are major cycles due to exert their influence to the downside as well.

While a market can rally substantially on light volume, which has continued to be meager and dry up in this advance, if we see a sharp break, it's anybody's guess as to where bids will show up in any kind of size.

It's important to remember that stampedes can happen on low volume, too.

The bullish case is underpinned to the idea that an upside stampede is imminent, luring in all the sidelined money ensnared with near-zero returns in bonds, driving the stock market to new highs. Anything is possible, but in reality history shows that volume doesn't come in until the final LOW -- not at the TOP.

While "the trend is your friend" is a cliché, clichés are so called because they are often true. Following the trend and staying with the market has rewarded the bulls, but the last 12 years have shown the benefit and necessity of market timing: cycle analysis has proven its value.

While momentum moves in the market embrace another cliché that reminds me of a former girlfriend who knew the price of everything but the value of nothing, as legendary trader Bernard Baruch said, "Speculation is about anticipating the anticipators."

And Facebook founder Mark Zuckerberg admitted "I have no idea what a company should be worth."

As we saw in the summer of 2010 and the summer of 2011, the market turns on a dime; most traders cannot and most institutional investors will not.

Readers of my articles, and subscribers to my service (free trial), are familiar with the shorter-term and intermediate-term time and price square-outs around current levels, and around this timeframe.

The big picture decennial cycles show a top for the year in February 1962 on the 50 year cycle (600 months).

Ten years ago in 2002, the S&P found a high for the year in the first quarter as well, collapsing into October.

On the 75-year cycle harmonic (900 months) of the 50-year cycle, from 1937, shows tops in early March.

Following the first little sell signal (Train Tracks) in late January, I assumed that an initial top would likely lead to a multi-week correction followed by one more push-up into March. Although not particularly shallow (33 S&P points), that correction proved to be just one more multi-day correction.

But here's what's interesting:

From the big October 27 high (which long-time readers will recall was a forecasted major trading day square out) to the breakout over the Neckline of an Inverse Head & Shoulders on January 3 was 66 days.

Another 66 days from January 3 projects to the end of the first week in March. Of course March 6, 2009 was the low at 666.

After the November 25 low came an Expansion Pivot buy signal on a strong thrust through the 50 day moving average. The first correction following that signal bar was 66 S&P points into December 19.

In other words, the first correction after a big-buy signal was 66 points and around 10 days.

Now, as noted above, we had a first little sell signal on January 26 that saw a decline to 1300 S&P.

A run-up of a symmetrical 66 points gives 1366. Basically a double top with last May's 1370 high.

Finally, from the major April 2010 high at 1220 to February 22, 2012 (2/22/12) is 666 days.

That's a lot of 6's squaring out. That's a lot of vibration with the low and the upcoming third anniversary of that low. Many market participants think of anniversaries as voodoo technicals; however, the third anniversary of the November 2008 crash low proved pivotal.

In addition, apart from the 2009 low, the first week of March or so also ties to the anniversary of major turns in 1937 (high), 2000 (high) and 2003 (low).

Given the symmetrical 66-point decline that shook the tree after the first buy signal, is the S&P carving out a mirror-image foldback of 66 points following the first sell signal in the short term that has squeezed players that will define the longer-term cycle highs?

As regards to the big picture, my takeaway is that if more than a nominal new high above the 1370 high is achieved -- let's say an authoritative move over 1400 -- the S&P is probably heading for the all-time high.

This is the message of the monthly chart.

From the 666 low to the important 1220 high in April 2010, which was the first primary high since March 2009, is a 554 point range. From the 2010 low at 1011 plus a symmetrical 554 points gives 1565. This of course ties to the all-time high in October 2007 at 1576. Got geometry?



Now, from the closing low of 735 in February 2009 to the 1220 high is a range of 385 points. 385 points plus the 1011 low gives 1396 S&P.

I think a close above 1400 with authority implies a third drive up to the all-time high, and that the lows in the summer of 2010 and 2011 were double bottoms supportive of that move.

Note the turndown of the three-month chart in the summer of 2010 defining the 1011 low in price, and the large range outside-up month last October that followed a 'test' of those lows.

Also, note the large range outside-up month in July 2009, which saw the S&P run up another nine months following a reaction after six months.

My advice: watch these 3, 6, 9, and 12-month harmonics. Yesterday, a trading bro pinged me to remind me that February was a big high for European stocks.



A weekly chart of the S&P shows that last year's high was defined by an Up Down Up Sequence in the 3-Week Chart. After the chart flipped down the second time, the market waterfalled. Note that this occurred just below the 1300 level, which ties to the big late October squareout high last year. Following the breakout over that high near 1293 put the market in a strong position, underscored by the behavior on the first weekly turndown 3 weeks ago that left a bullish outside up week.

Conclusion

Currently there is no 'rapid flipping' of the 3-Week Chart. However, that is not a requirement for a top, it is just one potential pattern to be factored in.

More important I think, is the pattern on the monthly chart which may carve out 3 drives to a high on a nominal new high above 1370. And it's possible that a failure to exceed the last swing high plays out within the spirit of 3 drives to a high.

That is why this time period into March and the idea of a nominal new high or a breakout is so critical here. There's good news and bad news. As I see it, either a third drive will play out somewhere between here and 1400, OR a leg up to the all-time high will carve out a larger third drive up toward 1550/1600, completing what is probably a quite bearish run of triple tops from 2000, 2007.



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