As I walk along I wonder a-what went wrong
Runaway (Del Shannon)
Yesterday something very important happened. The NDX
turned its Quarterly Swing Chart down on trade below its July low, the 3rd quarter low.
Click to enlarge
That makes today crucial. If we were just in a correction, the July low should have held. While so far the break is only marginal, a failure for a reflex rally on the quarterly turndown today or in the next few days is very bearish.
From my perspective, accelerated momentum and continuation here below the quarterly is a sign that the market is in the grip of a major bear market.
The tape has already been telegraphing that by virtue of the angle of attack to the downside:
1) Note the knife through the 50 dma and the failure following a backtest of the 50.
2) Note the runaway downside move following the snap of the 200 dma.
In a correction, normally the 200 day moving average acts as important support. Sometimes it is undercut, but the recent stab below the 200 dma is not a marginal undercut. It shows intense selling more in keeping with the idea of a wave 3 down. This notion is supported by the increase in volume on the break of the 200 dma.
The benchmark S&P carved out a Head & Shoulders Top, which projects to around 1325. This is an important level for several reasons as it also represents the 3rd quarter low, the Quarterly Swing Chart low and is also 360 degrees down in price from the 1474 recovery high scored in September.
Interestingly, the Neckline of the H&S Top was pretty much defined by the Monthly Swing Chart low, the October low at 1403. This level was decisively broken on November 7th, another sign of the bear as the index failed to stage a reflex rally on the turn down of the monthlies. Instead we got accelerated momentum.
Note how the S&P exploded out of a ‘high handle’ carved out in August and early September. This was the climax run from 1400 to 1474 that obliterated bears.
Note the mirror image implosion on the break back below the handle beginning in early November.
So, this handle equates to the Neckline of the H&S Top.
We got roughly a 72 point blowoff (1/5 the 360 degree circle). Now a similar move back below the neck ties to around 1325.
At the same time, a Measured Move of the 155 point April/June decline ties to around 1319.
Notable was the substantial increase in volume on Wednesday’s large range sell-off.
Either today should see a plunge toward this 1325 level or a down open gives rise to a squeeze since today is options expiration and calls have been decimated and many shorts may want to cover in front of the weekend.
If the S&P follows suit with the NDX and turns its Quarterly Swing Chart down, which is one solid down day away, and does not stabilize, the odds are the 1370 ‘pause’ at the 200 dma was a mid-point projecting a plunge to 1270ish.
This ties to flat on the year which could satisfy our Ski Jump pattern. So while the market is deeply oversold, deeply oversold markets that fail to rally are dangerous markets. I haven’t heard anyone mention a crash or that we’ve been in a crash on the financial media stations. What we mostly hear are forecasts as to when and where a low will be. Until that changes, there is probably no sign of a tradable low.
A plunge into 1325 or lower in front of the weekend would probably change the dialogue over the weekend and inspire a headline or two about The Crash and whether we are reliving the debacle of 2008.
This could mark a point in sentiment that allows for a relief rally.
Likewise, a plunge today to our 1325 number has some good symmetry not just to the range of the April/June decline, but to the duration of that drop.
The April/June decline was 43 trading days, the current decline from high has been 42 trading days.
So a plunge to this potentially key 1325 level today/Monday could be interesting.
Remember also that a great many stocks found lows in the next 4 days in 2008
Above I noted that the characteristics in price and volume since November 7th are consistent with a wave 3 decline. So, any bottom here, whether it comes on a flush-out toward 1319-1325, today for example, or from an option expiration squeeze right from here in front of the weekend probably only marks a 3rd wave low of this first leg down. This would be followed by an upward correction that could last 3 to 10 sessions (1 to 2 weeks).
This could mirror the wave 2 bear flag that traced out a backtest of the 50 dma going into November 7th.
we mentioned the big November low in Apple
(AAPL) last year and in 2008. Today’s date, November 16th ties to a price of 526. So this is a level to watch, especially if AAPL gaps down today and regains 526 and extends into the green.
That said, AAPL has sliced through a slew of possible time/price setups.
AAPL is now well below its ‘tipping point’ for the year in its runaway downside move. The mid-point for the year is around 552. So, AAPL has overbalanced its advance this year. If AAPL is in a Ski Jump, it may retrace all the way to toward 400 and the upside gap from January.
Last month, I suggested that more money could be lost in AAPL on the way down than was ever made on the way up. I received several emails asking how this was even possible. It’s possible because the stock is so well loved that those who loved it at 600 and 700 see every tick down as an opportunity.
Actually AAPL is acting more like Research in Motion
(RIMM) on the way down from its high than it is like AAPL.
Something is happening here. Something is happening when the most owned stock on the board sees such intense selling and liquidation.
Note that a strong stock like AAPL didn’t even pause at its 200 dma, which should have acted as support had this been a correction. Likewise, the authoritative break of the prior swing high at 644 was a sign of the AAPL bear.
Same is true of the S&P as we warned in September: snapping the prior April swing high of 1422 implied lower prices and breaking below last years 1370 high confirmed a major top.
Yesterday’s late rally could have been a sign of a squeeze to play out into today’s option expiration or it could be a sign of the Fed coming in to avoid memories of the debacle in November 2008, especially with the Middle East getting nasty again.
That said, the Fed did not or could not backstop the market following its QE Infinity announcement in September. It allowed or could not prevent the S&P from falling below the 1400 level where the run into the QE announcement began. This has not been lost on professionals.
History will record the irony that the markets top came on the announcement of QE Infinity and that AAPL’s top came on the announcement of the I-Phone 5.
Infinity ain’t what it used to be.
The S&P shows a large rounding top on the breakout above the April high. That breakout created calls that the index was going to score new highs before the end of the year.
As we’ve noted in this space several times, the cycles, like 1980 and 1972, called for a plunge into the election. The market is not a fine Swiss watch---the plunge continued past the election. However, those years saw a rally play out into late December/January.
If that scenario plays out and the S&P should recapture its 200 dma and rally back into massive resistance around 1400, it looks like it could put in a big picture massive right shoulder for 2012.
If so, any subsequent break below 1270 projects to 1070ish.
. Despite war news in the Middle East, gold and oil went down. This is a change in character and behavior that likely indicates money is running out around the world and the deflationary spiral we’re going to see all next year.