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1460, A Hundred Points Either Way

Oct 17, 2012 7:42 am Print Print

In this business, there are seldom clear and definite answers. It is a game of probabilities. And in recent years it's become a game of PROPabilitites with the market being propped up by the Fed.

So what to do... Will the Jaws of Death pattern carved out by the flagrant non-confirmation between the DJIA and the Transports ultimately mean anything?

Will the cluster of big cycles due to hit from September through October be staved off by the Fed action?

Will the market shrug off uncertainty and concerns about the Fiscal Cliff leading to an Equity Abyss?

Is it possible the market runs up into the end of the year, right to the brink of fiscal decision come January like Wile E. Coyote? If it does so, will it mirror the action into the end of 2007 when the market shrugged off the indelible warnings written on the wall of worry? Is it possible the market repeats the buoyancy into the end of December 2007 in order to capture bonuses before the Year of the Locusts?

I am not at all convinced we are going to get continuation here into year-end from a one-day momentum rally, but if the S&P gives a Follow Through day which could only occur following the 4th day from a low, (between the 4th and 7th day) and if the S&P recaptures 1460-1468 with authority, it's possible.

I initiated a pilot position in the QID yesterday and will add to it only on an opening pop up this morning that fizzles out near 1460.

They ran the expiration programs on Tuesday up to the last daily sell signal with the S&P tagging the low of the high bar from the October 5th reversal.

The SPY low on October 5 was 145.69. Yesterday's high was 145.63.



So, we have a large-range reversal from September 14 and another on October 5. Moreover, both were time/price square-outs as you recall -- the first at 1468 the later at 1460.

A 3rd Topping Tail or reversal from well-defined resistance around 146 (1460 cash) would carve out a possible Charlie's Angels topping pattern.

So the question is, was Tuesday's Gap & Go the beginning of something or in the fullness of time, will it pan out to have been an exhaustion gap fueled by options expiration and short-covering? While it is not a bull market in rationality, a rebound off the logical level of the 50 dma (which was hit on Friday) combined with an options expiration week is a potent short-covering cocktail that makes sense.

In addition to being a test of the low of the high bar day, the above chart shows 146 ties to a backtest of a Live Angle running up from prior recent lows.

While the SPY/S&P is in the Minus One/Plus Two position, trade over Tuesday's high today will turn the important 3 Day Chart up.

If the trend has turned down, a turn up in the 3 Day Chart should define high soon in terms of both time and price.

So while there are seldom clear and definite answers in this game, the market will talk to us today/tomorrow based on this methodology.

And remember that Thursday will be the first time that a Follow Through Day could play out on substantial expansion of range and volume on the 4th day from the low.

If the SPY reverses to the downside from around 146, it could leave another higher low and what I call a Test of a Test pattern -- potentially bearish.

In other words, September 14 was a high. October 5 was a test of that high. A reversal from a test of the October 5 high would leave a bearish Test of a Test pattern.

Remember that bottoms often 'V' off the low but tops are more likely to be a distributive process.

Checking an hourly SPY from October 5 shows channel 'octaves' also tie to 146. These 'octaves' are created by an equidistant trendlines.

The first connects declining tops. The second ties to Monday's high prior to Tuesday's upside gap.



Note the intersection at 146 with a little hourly Live Angle.

Conclusion. Tuesday's runoff carved out a large range outside up hour. Trade below that that ties to a break of the 145 strike which 'should be' supportive if the rally is the real deal.

Offsetting 145 SPY with a reversal that stabs below Tuesday's last hour upside reversal is a warning that the market may be in fact tracing out another higher low at the critical 1460 S&P area.

I would not be long of stock if the S&P sees an ensuing break of 1422 over coming sessions.

Losing 1422 following a series of lower highs (if that proves to be the case) implies a 100 to 200 point S&P decline.

The other side of that coin of course is the bulls betting that new swing highs implies a 100 point advance.

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