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business newsAnatomy of Blow-Off Tops
By
Jeffrey Cooper
Mar 11, 2010 9:30 am
In light of the anniversary of NASDAQ's record high 10 years ago, a look back at some from the past.
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Good and bad, I define these terms
Quite clear, no doubt, somehow.
--"My Back Pages" (Bob Dylan)
“Millionaires don’t use astrology, billionaires do.”
--J.P. Morgan
“The past decade was the dividing decade. It was the decade when the 'buy and hold' investors came away with little or nothing. The next ten years will be an exercise in 'how not to lose money.' Making money by borrowing and turning your debt into profits is history, it’s over. The ideal position for the coming decade -- being out of debt. Back in the 1930s, debt and mortgages were both dirty words. They will be again.”
--Richard Russell
What if one year ago someone told you the Dow Jones Transports would be up 100% by March 2010, and followed up by asking “would you be chasing stocks or would you be selling?”
Like the proverbial frog in the pot of simmering water, it’s easy to be snowed by a "lukewarm" (look warm?) equity environment, while viewed through the lens of time the same pot of circumstances would look scalding hot.
Since yesterday was the anniversary of the NASDAQ record high 10 years ago, let’s turn back the pages and look at some blow-offs.
Looking at the daily chart of the Naz from October 1999, we see that the last phase of the advance was five months or approximately 150 calendar days, with the last ditch blow-off move being 28 trading days.
150 days is a biblical cycle that I'll get into at another time. The 28-trading-day period is interesting as this is the DNA of the pattern from waterfall declines. For example, many crashes have occurred from a retracement peak on the 28th trading day following an initial break; 1929 and 1987 being the two most illustrious examples of the pattern. So it's interesting that this 28-day trading pattern shows up at the Naz top in 2000. Don’t you agree?
Is it coincidence that the 28th trading day from the January pivot high this year was March 1, when the S&P broke out over its 50-day moving average on convincing trade above a .618 retrace of the Jan./Feb. decline? (Do they have technicians at the Fed? Do they have astrologers on the payroll at the Fed? What a question for Ron Paul!) Remember my touching on the notion that in my experience, retracements that exceed 70% usually indicate a complete retest of the high, a marginal overthrow, or that a new leg is underway? The market was speaking on March 1 and has ground higher ever since.
March 1 is precisely where the Gann Death Zone or culmination point should have tapped on the breaks of the rally with a four-to-five-day waterfall to commence by March 10/March 11. While it clearly appears the Gann Panic Pattern has been negated (once again), you never know; a lot can happen in four days when the inmates are running the asylum, when the algorithms get rhythm.
It's interesting that yesterday was the anniversary of the decennial top of the Naz. While many market participants, pooh-pooh the idea of anniversary dates being anything more than mumbo jumbo analysis, Gann said to ignore them at your own peril.
There is a typo in the chart above. It should read the DJ Tranports are up 100% in 12 months. Also note the NAZ doubled in six months.
It's undeniable that the anniversary of the 2002 bear market low found the 2007 bull market high, for example. It's undeniable that the early September test failure of the March 2000 top was the anniversary (plus or minus a day) of the September 3, 1929 top.
It's undeniable that the July 2002 climax, capitulation low is the anniversary of the climax blow-off top in July 2007 -- and that both are the anniversary of the July 1932 record low at DJIA 40.56. It's happenstance that July 4, America's birthday, aligns with 1576 S&P, the record high? Anyway, you get the picture. I believe anniversary dates are worth watching, to say the least.
Looking at the daily chart of the Naz blow-off is quite revealing. You can learn a lot just by looking if you take the time. What I'm referring to is the concept that a market (or a stock) can break back through trendline support. Once a shakeout occurs and traders recover, the second such break through support typically changes the trend. In other words, think of the market as walking up a staircase; it can lose its balance and stumble one stair step back and regain its posture, but losing two stair steps generally sees a stumble. As I like to say, the second mouse gets the cheese. In the case of the daily Naz chart, the undercut of the trendline, which likely flushed many stops and longs, resulted in the final phase of the blow-off. And, it was a doozy. However, the next time the trendline was violated; it was a downside doozy (that’s a technical term).
Was the decline this February that broke trendline support on the popular indices such as the S&P the first stumble, with the current rally, a last ditch run?
Checking the weekly chart of the NAZ shows that the blow off phase into March 2000 was 19 to 20 weeks with the final whoop-‘em-up lasting six to seven weeks. It's worth considering that from the November 2009 S&P low; the Ides of March will be the 20th week up. Next week will be the sixth week up from the February low.
As you may recall, a few weeks ago I touched on the new moon of March 15 as coinciding with some powerful more esoteric cycles. Will the market be sucked up into Monday’s new moon? Is it possible that we could see a four-to-five-day waterfall like the pattern on the S&P 10 years ago in March/April 2000? Note the spike up into March and the near-immediate complete give-up of the move. This was approximately 200 S&P points up and 200 S&P points down in a short period of time. Talk about train tracks. The market was talking: If volatility precedes price, these train tracks defined the high that led to the bear market/crash into July 2002 (with October being a test). These 200-point train tracks defined the following decade. The Spring Equinox of the new millennium -- the March/April 200 S&P point train tracks of the new millennium defined the decade and the big decennial train tracks to follow: a 50% decline into 2002 and train tracks right back up to the highs five years later in 2007. Compressed through the lens of time, the decade was a day at the beach. Here we are back at high noon stuck in the middle between the sand and the surf, at the 50% line of scrimmage.
Is it possible the market will waterfall in over the next week? If so, today will be a hard down day or the analogue is void. Is it possible the market will peak going into Monday, March 15 and waterfall into the first week of April? If you recall April 8 sets up as a big turning point: taking the bear market decline of 910 S&P points (from 2007 to 2009) and converting price to time and adding 910 calendar days to the October 2007 high gives April 8, 2010. Will this be a big day in history? So we have two big potential turning points -- March 15, plus or minus and April 8, plus or minus.
Checking the anatomy of the S&P blow-off into March 2000 also shows that the beginning of the topping process was in January (like January 2010?). Notable is that the number of days spent accelerating once the January high was exceeded in March was only three to four sessions! This harmonizes with the three to four sessions of the waterfall decline into April! The important thing to notice, I think, is that those prior "highs before the highs" were recaptured in July 2000. Following that short-lived recapture, the S&P stabbed back below these prior highs (around 1475 S&P) once again.
The 1475ish level was regained once again, however, the second stumble back through the Maginot line saw the S&P stumble in earnest. Two stumbles and a tumble. I can’t help but wonder if the December 2009 highs equate to the January 2000 highs. The S&P broke out above the December highs early this year but accelerated on the breakback below the December highs. Those December highs near 1086 coincide with the bullish pivot on February 25, the bullish "tail" at the 20-day moving average that defined the impulse for the current rally. My thinking has been that if the December highs of 1130 were recaptured, the market would extend. It certainly has.
Many stocks are powering higher (Baidu (BIDU) and Apple (AAPL) for example) and many indices (such as the RUT and the Transports) have made new recovery highs. The DJIA/S&P still haven't scored new swing highs. The S&P is verging on doing so but may leave the DJIA with a non-confirmation (like the Dow Non Confirmation with the Transports). It looks like a "stealth blow-off." My point is that if the December 2009 highs at 1130 are violated for a second time, it may be the sign of the bear, just as it was 10 years ago.
Conclusion: Blow-offs by their very nature don’t pause for long. Consequently, given the multiple cycles that are "hot" in March and into April this year, any reversal day from this point on -- such as the large-range reversal in October 2007 -- should be respected until proven otherwise. At the same time, as shown on the monthly chart of the S&P yesterday, if the monthly reversal bar of January is offset, a stunning, and short-lived blow-off could play out in an echo of the blow-off in March 2000.
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No positions in stocks mentioned.
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