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Will the Three-Week Chart Elicit a Rally?

Jan 30, 2014 8:58 am Print Print

Monday's decline kept players leaning long. Then, the market gapped up on Tuesday. Tuesday's rally had players looking for an extension higher then the market gapped down with authority on Wednesday, testing Monday's lows near 1770.

Mr. Market is nothing if not perverse, so with 1770 being tested, does that mean the market will open up and grind higher today?

Remember that this 1770 vicinity is important as it squares the last week of January.

February 4 (week of) is 90 degrees square 1850 and 90 degrees square 1765. An idealized low would be perfected for February 4 at 1765, but the market is not a fine Swiss watch.

Click to enlarge

Around the end of the time frame of the first week of February is when, following an idealized crash analogue from 1929 and 1987, a pivot high would be expected.

We don't have to be following that roadmap, but history is a good guide, especially considering the cycles and the big picture analogue from the last two years.

Perhaps there is one more push lower before a retracement plays out -- if one is going to.

A 10-min SPX Chart for Tuesday and Wednesday shows 5 waves down and a possible 3 drives to a short-term low.

10-min SPX Chart:

The prospect for one more plunge is suggested by a third lower high on Wednesday's 10-min chart. Trade above or around 1780 suggests upside follow through with the third higher low being offset.

Yesterday, we showed the monthly ascending wedge on the SPX. Wednesday may have traced out a little intraday descending wedge indicating the possibility of a rally attempt from here.

That said, surprises happen in the direction of the trend. My belief is that this decline is not a countertrend inside a continuing bull market. I think the primary trend has turned down.

The power of the decline, the angle of the attack lower from all-time highs to a break of the 50 DMA on the major indices in just days and the inability of the indices to turn their daily charts up since falling out of bed underscores the change in trend.

Be that as it may, the Daily Swing Chart should turn up... soon.

The turn up could be a 1-to-2-day rally, or it could carve out a 6-day rally like that in 1929 shown in this space yesterday.

As you can see, even preceding the most devastating of storms, strong rallies can play out.

One of the strongest 1-day rallies (point-wise) in the DJIA played out in early October 1987, a few weeks prior to the crash.

Ideally, one more decline should play out to around 1765, which would satisfy a 180-degree decline off high.

Daily SPX Chart:

The idea of a trend change on the dailies is evidenced by the authoritative break of the prior swing high (point B) in concert with last Friday's Expansion Pivot sell signal. An Expansion Pivot sell signal is a move below (or above) the 50 DMA on the largest range in 10 days.

This week's action saw a short-term trendline break (T L 1).

Whereas a backtest of the 50 DMA looked plausible on Tuesday's close, now it looks like resistance is 1800.

If a rebound plays out to around 1800 over the coming week or so, it could be carving out a decidedly bearish DROOP right shoulder -- as opposed to a more symmetrical right shoulder.

Interestingly, a droop right shoulder was the pre-crash pattern from 1929.

With 360 degrees down from high equating to 1682, it clearly looks like a flush of the 200 DMA is in the cards.

Let's turn to the weekly SPX.

Weekly SPX Chart:

The 3-Week Chart on the SPX is now pointing down. The expectation is that a rally would be attempted from this position SOMETIME beginning this week. Each turn down of the 3-Week Chart defined a low (points B). However, note that there is a trendline that ties to around 1730 that looms large. This ties to horizontal support as well. Note that the more pronounced horizontal support in the form of the August and May highs near 1700. These tie to the 200-day moving average. Remember that a move below 1767 ties to an overbalance in price. I can't help but wonder whether the SPX won't poke its head below 1767 (satisfying a 180 degree decline from high) before a rally phase is perpetuated. The market has a memory. It knows these numbers.

There is much information to be gleaned from the weekly chart that helps determine the change in trend offered above:

1) Note that a trendline (green) from the November 2012 low broke this week. It is true that this trendline was also broken in early October, but importantly, that week saw the SPX tail back up and close ABOVE the trendline. My take is, bearishly, the second mouse is getting the cheese as to this week's break of this significant trendline.
2) The behavior subsequent to this week's turndown in the 3-Week Chart will give us important information. Whether or not the SPX rallies right from here or not, when it turns back down and breaks the circled 3-Week Chart low, a weekly Time Turn Trend sell signal will be issued.

Checking the RUT shows this weeks break of the 50 DMA coincides with an Angular Rule of 4 sell signal -- a break of a rising 3-point trendline. A backtest of the 1145-1150 area would not be surprising. We will look to initiate a short if it plays out. 360 degrees down on the RUT ties to a flush of the 200 DMA.

Daily RUT Chart:

Conclusion: There is another analogue that a friend sent me last weekend.

Nikkei Analogue Chart:

Click to enlarge

What is interesting is that the Nikkei topped near the last trading day of 1989 while the DJIA topped on the last trading day of 2013 (so far). Additionally, we have flagged the first week of February as pivotal (being 90 degrees square the price of the 1850 high) and roughly 40 days from high, which ties to a final pivot high in the two greatest crashes on record in the US. Note February 7 on the chart.

Recently, we offered that 2014 tied to a cluster of "7s." January was the fourteenth month (7 X 2) from the important November 2012 low at 1343.

The range from 1343 to 1850 is 507. This ties closely to the 512 days from the October 2007 high to the March 2009 low. There is some symmetry apparent between what looks like a blow off price wise from November 2012 into December 2013 and the duration of the waterfall decline from the October 2007 high to the March 2009 low. On the Square of 9, the numbers 507 points to February 4.
Position in IWM and SPY



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