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VIDEOStock Market Has Dramatic Change of Heart
It peeked below 1040 yesterday morning. But wherever this rally goes, I'll be scaling into additional short side exposure. Change of heart? Not here.
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Whoa yea, oh boy
Looks like we finally reached the turning point
Oh me, oh my
Looks like it’s time for me to kiss it good-bye
-Change Of Heart (Tom Petty)
The market had a dramatic change of heart as it peeked below the 1040 kimono yesterday morning.
“The long ‘tail’ and outside up bar on the 10-minute SPY was a ‘telltale’ sign following a stab down that undercut Tuesday’s lows at the critical 1040 level. The whoosh down coincided with bad housing numbers with the S&P turning on a dime and leaving a 'news reversal’ buy signal. Follow-through of course is key and after the first pullback the S&P extended."
As I said in a morning alert:
"The S&P is leaving a long tail on the 10-min this morning after undercutting yesterday’s lows and tagging the jugular at 1040. You think the Working Group doesn’t have charts and crayons…the S&P may have carved out a first-hour low like yesterday. It’s going to be a chore for the bears to break this tail this morning…”
Now, looking at an overview of the year framed by a weekly chart of the S&P, clearly there are triple bottoms at the 1040ish level with an intervening one-week undercut/close below 1040 at the beginning of July. Could it be a bullish head-and-shoulders? Possible. However, only trade 100 points above the jugular at 1040, i.e.1140 will confirm a projection higher. That’s a loooong way to wait. We all know what 10 S&P points on the upside can mean if you’re short a "go-to" momentum name. What to do in the interim?
While it's possible that the S&P has carved out an inverse head-and-shoulders on the one more plunge down to 1048 that I’ve focused on for a few days now, first and foremost the S&P has to regain 1070 (ideally on a weekly closing basis) before the notion of a good low and a legitimate turn gains credibility.
At the same time, the market certainly reacted and responded to the square out of time and price with a change of heart and a reversal of fortune: Yesterday was 1048 calendar days from the October ’07 top and the S&P tagged key support at 1040 as it knifed through 1048 but reversed sharply to rally up to 1059.40. As I mentioned in an alert, a move up to 1062 should offer a solid risk to reward short as if the index is a persistent downtrend, 1062, which is 180 degrees down from the August 1129 high, should define important resistance.
Above I mentioned that in order for the idea of a good low and the inverse right shoulder to be credible, the S&P would have to regain 1070. Why? 1070 is 50% of the July/August range. 1070 is also 50% of the recent swing from the 1100 high on August 18 to yesterday’s 1040 low.
So, we have a band of resistance between 1062 and 1070.
While it's possible that a weekly inverse head-and-shoulders bottom could be playing out from June, there's a big picture head-and-shoulders top formation that extends from January, with January being a left shoulder, April the head, and August the right shoulder. In other words, we have a possible monthly head-and-shoulders top doing battle with a possible weekly head-and-shoulder bottom. Hoofy and Boo have been doing a good job running the clock, playing rope-a-dope with Mr. Market and sucking premium in between. Hey, a guy has to live.
But, in my opinion, come the end of summer and the anniversary of the September 3, 1929 high coinciding with the 2000 snapback test failure high, it will be the last exit to Whiplash City and the trading range will end. I think the market has some business, and it’s September business. My view is that business is downtown.
The larger time frame should take precedence; however, as you know, we have the little matter of the time price square out at 1048, 1048 days ago with Tuesday’s close. The moral of the story is that if the time/price square breaks it will break with conviction. If the horizontal support triple bottoms at 1040 it will break with a resounding snap. As you know, there are few quadruple bottoms: a break of 1040 implies 940 or lower and my hunch is it plays out in short order.
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