The Russian situation caused the SPX
to sell off hard last Monday, following through from the previous Friday's signal bar reversal -- a Topping Tail from all-time highs.
Monday's weakness turned the Weekly Swing Chart down for the first time since early February.
was indecisive with the index closing in the middle of the day's range. However, the Turnaround Tuesday
urban legend saw the SPX off set Friday's reversal signal with authority. Tuesday
left a powerful Reversal of a Reversal buy signal with the takeaway being twofold:
1. So far, the SPX has yet to see upside follow-through after three days. That makes early this week pivotal.
2. It makes Tuesday's lows important for this week. Trade below Tuesday's lows this week suggests Tuesday was an exhaustion move.
, the balance of the week was a mixed bag. The jury is still out as to whether the last three days of the week were consolidation with the expectation of upside continuation this week or whether Tuesday
was a buying climax.
The action in the leading biotech sector, which saw a strong give-back late last week, suggests the spike to our 1877 SPX square-out level may be a top of some degree.
Daily BIB Chart:
10-min BIB Chart:
I have heard several pundits on TV say that there can be no top for at least several months because the NYSE Advance-Decline line is confirming the move.
They don't know their history.
In July 2007 NYA/D was making new highs in sync with the NYA
prior to a 14% decline in a month. July proved to be the primary high followed by a nominal new test-failure high 90 degrees later in October.
Weekly New York Composite Chart from July 2007 to Present
October 2007 did mark a divergence between the New York composite and NYA breadth.
This was prior to what popular consensus now embraces as a "generational low" in 2009.
So, let's look at the history, "post-generational low".
In January 2010, the NYA made a new recovery high in tandem with the NY A/D line, scoring a new all-time high ABOVE the 2007 peak. Nevertheless, the NYA dropped just over 11% in under two months.
In late April 2010, the NYA made a new recovery high concurrent with the A/D line making a new high as well. Again, without the benefit of any divergences, the NYA sold off 17% in just over a month.
In May 2011, the NYA and the A/D line were making new highs prior to a 26% decline.
In March 2012, the NYA made a lower peak below the May 2011 high while the A/D line was setting new highs followed by a 13% decline over 3 months.
In May of 2013, both the NYA and the A/D line were confirming again just prior to a 9% decline.
Finally in January 2014, there were no warning signals and no flashing red lights for a divergence in the NYA and NYAD prior to a decline of just over 6%.
The January decline set many bulls' hair on fire, and it wasn't even a 10% decline.
Can you imagine what the sentiment will be on the next 10% correction? Since January did not satisfy a 10% give-back in the NYA and since there hasn't been one in the SPX for over two years, the odds are high that we will see one in 2014.
Can you imagine how quickly a sell-off could unfold if a peak in the New York Composite occurs with a corresponding divergence and lower high in the A/D line like the second top in the fall of 2007?
The bottom line is that new highs in the NY A/D line does a lousy job of warning of large declines in stocks.
What about measuring internals through the prism of the percentage of SPX stocks trading above their 50-day moving averages and their 200-day moving averages?
Prior to the persistent advance in 2013, a negative divergence in the number of titles above their 50 DMA preceded many (not all) tops. A negative divergence was bearish. When the number of stocks above their 50 DMA was not confirming the SPX, it was a bearish indication.
During the powerful stretch in 2013, there were two negative divergences in the 50 DMA that did NOT lead to a top.
The takeaways from measuring breadth are these:
1. Divergences can last for a number of months. So, it's dangerous as a timing tool.
2. Sometimes a sign of better breadth (as shown above) is a sign of market exhaustion. It can be indicative of a bull trap. For example, the May 2013 high was preceded by a three-month negative divergence. Then, breadth jumped and confirmed a new high right at the top. But the sign of improving breadth was a sign of exhaustion and a trap for bulls.
The moral of the story is that all indicators are descriptive rather than predictive. This is why you almost never see me referring to or using indicators. Most all indicators are derived either from price or from price and volume and, as such, are of second-degree magnitude. Additionally, most indicators are not time-based, so they are inferior as time is more important than price. I like going right to the horses mouth: price and time. Price is the final arbiter. Time is the judge.
The methods used in this report along with several Gann methods, seek to marry price and time in identifying turning points.
However, apart from time and price, internal measures of breadth can be valuable when putting the pieces together -- when they jibe with time-and-price harmonics.
So, what is breadth saying about market health currently?
The percentage of SPX stocks above their 50 DMA and 200 DMA are diverging lower. Before 2013, that WAS a reliable sign of caution and deteriorating market health. Right now, a warning is being flashed.
There is ample reason not to shrug the warning off because cycles and the market's own action since the beginning of the year have demonstrated that 2014 should see increasing volatility as opposed to the persistency of 2013.
2014 should be a bull market for market timing, as opposed to buy and hold.
There is ample reason to suspect that the January decline may have been a decline off a primary peak (like mid-July 2007) and that a secondary peak may be set somewhere around 90 degrees out, which takes us into the end of March or mid-April based on the SPX December 31 and April 15 peaks. IF such a secondary peak occurs, it does not necessarily mean that the market will spike higher in an uninterrupted blow-off. There could be a 1 to 2 week shake out first followed by a last-ditch run, assuming that the end of March or mid-April are pivotal.
There is reason to believe March is pivotal, such as the 60 to 61 month cycle as flagged in this space. Moreover, April 15
is the first of four blood moons, a lunar eclipse.
Recently, we noted that the market may be carving out an analogue to 1937
when a five-year rally played out from a generational low in 1932.
The rally into the MARCH 1937 final peak was 1707 days. It was four months shy of being 60 months or five years in duration.
However, the secondary peak in August 1937 (which was a marginally lower high than the March high) was five years and one month from the 1932 low.
What is interesting is that if we zero in on April, we see that the peak at the end of December ties to a 56-month period (four months shy of 60 months) possibly mirroring the 56-month peak from low in March 1937. So, this April ties to the final August peak in 1937 (61 months from low). April will be 61 months from the March '09 low.
The sixty-first month up from the 1932 low marked a pre-crash high. The DJIA
declined from around 190 to 133.64, a 30% decline in three months.
This April 15 is a solar eclipse and first of the blood moons as noted above.
The power of eclipses is figured prominently in the work of W.D. Gann, particularly in his book Tunnel Thru The Air
Several market technicians who methods combine astronomic cycles have found that past eclipse paths can be activated by current eclipses. The belief is that events occurring near eclipses are important and memorable. They energize activities around that period. Events around eclipses can be fated and unexpected.
What is interesting about this mid-April eclipse is that April is a Fibonacci 618 months from the Cuban Missile Crisis, which was the last great showdown between the US and Russia.
In addition, as you recall, the period around April 19-20 is a date of destiny, including the beginning and ending of many wars involving the US
Today is the anniversary of the 1937 high and days from the anniversary of the 2009 low. The high in 2000 was March 24. We are 77 years from the 1937 peak with 77 being 90 degrees square March 20, the Spring Equinox. We are 14 years from the March 2000 peak with 14 being 90 degrees square April 15. April will be 61 months from the 2009 low. On the Square of 9 Chart, 61 is 90 degrees square March 20. If stocks are going to accelerate above this key 1877 level, a price of 1921 is 90 degrees square March 6 with 1915 being 90 degrees square March 20-21.
So, there are a lot of powerful vibrations throughout March and mid-April.
Daily SPX Chart from June:
Form Reading Section:
Criteo SA (CRTO) Charts:
NewLink Genetics (NLNK) Charts:
No positions in stocks mentioned.