Why the High for the Year May Be In
The arrested are returning to the scene of the crime.
The closing low for the Dow Jones Industrial Average (DJIA) this year was 6547 on March 9. On September 22, the autumnal equinox, the DJIA closed at 9830 -- which represents a 50% gain from the low -- and stalled out.
The S&P 500 hit a 50% gain off its March intraday low of 666 at 999 in early August. A 50% gain off its closing low of 677 equates to 1015, or approximately a Fibonacci 0.382 retrace of the entire bear market.
Did the market hold up until the DJIA could reach its 50% mark off the low -- until quarter end, until the Autumnal Equinox?
Markets seek equilibrium. The 50% Rule is powerful -- acting as a point of balance in the markets. For example, the decline in the S&P from its 2000 peak found its low precisely 50% off that high in 2002.
The S&P attempted to turn down after hitting its 50% mark off the low with a stall out in early August and a stab down on August 17. There was no follow-through.
This period coincided with the five-month retracement after the crash low in 1929. When the fear of that analogue was broken, prices headed higher. The DJIA had a date with destiny apparently.
Both the DJIA and the S&P had dates with their respective overhead 20-month moving averages. This week, both averages returned to the scene of the crime -- the gap down from October 2008. The market reversal from that gap was dramatic, underscoring that many factors converging at this one-year cycle may very well indicate the high for the year may be in.
In addition, a daily chart of the DJIA shows a "Pinocchio" just above the upper channel of resistance. Such overthrows and subsequent violent reversals often define significant turning points.
It's possible of course that the market is undergoing some shenanigans courtesy of mutual fund gamesmanship, and that following quarter end we'll turn back up.
However, do I think there's a better-than-average likelihood that any turn-up will be a retracement and snapback -- a test toward the high? It's possible that the DJIA and S&P will mimic the pullbacks in early August and then again at the beginning of September, but I doubt it. Why? Too many square outs, the calendar, and there are three drives to the top of a channel -- just as there were prior to the correction into July. That has been the only meaningful correction since the March low. At the very least, I think the market has scored an interim high and the ensuing correction should be on par with the sell-off into July. That was just under 10% on the S&P.
In addition to the three drives to a high, the current reaction is the third knife down in the DJIA and S&P. The market often plays out in threes. With the DJIA perched on a rising trend line just above its 20-day moving average going into the week end, it's do or die for the bull thesis. And, this Friday may have the bulls more nervous than the bears for two reasons: Research in Motion (RIMM) and the downside angle of attack after the Federal Open Market Committee on Wednesday.
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