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Subterranean Cliff Notes

Nov 19, 2012 8:15 am Print Print

Don't follow leaders
Watch the parking meters

Subterranean Homesick Blues (Bob Dylan)

"Aristotle believed that the brain existed merely to cool blood and was not involved with thinking, which has proven true for certain persons, mainly politicians" Derived from Will Cuppy

"I have come to the conclusion that politics are too serious a matter to be left to the politicians." Charles De Gaulle

Geopolitical Cliff, Fiscal Cliff, Economic Cliff, AAPL Cliff. Hey if you can't trust Apple (AAPL), who can you trust, Congress?

W.D. Gann said time was more important than price. As we noted in the last piece, the April/June decline ended on the 43rd trading day and Friday was the 43rd trading day from the September high.

I am pretty sure politicians are tone deaf to W.D. Gann and time, but price seems to get their attention.

So going into the anniversary of the November 2008 crash low, when the great American pastime of shopping begins in earnest, the powers that be put on a brave face and held their noses and made nice, as Jerry Lewis would say, to avoid weekend comparisons to the debacle in '08. The political PR made for some strange bedfellows.

"An honest politician appears on the scene as often as a celibate whore." William Ferraiolo

Of course, behind the scenes The Bernanke was probably playing Geppetto with the Dems and Republicans. Ben has a penchant for pulling strings on option expiration. I remember well just such an episode in the summer of '07 in the eye of the hurricane swirling around the markets.

So while the squeeze we suspected into options expiration played out courtesy of decimated call options and political pantomime, the clock is ticking to see if the market can follow through any more than the politicians can kick the can down the road.

Despite Friday's reversal on the heels of political posturing backstopped by probable Fed fiddling, the realization that Quantitative Easing won't substitute for Qualitative Solutions has a firm grip on the mind of the market.

"You see, the medicine will become the poison." Robert Wiedemer

Friday's reversal is in the spirit of a Key Reversal Day. I say in the spirit because the close was just shy of a close above Thursday's high. Nevertheless, the S&P did carve out a relatively large range outside up day and may be able to kick the can down the road to a backtest of its overhead 200 day moving average over the next week or so.

This could mimic the backtest into the 50 day moving average into early November prior to a waterfall decline.

The price and volume characteristics of the decline from the 50 dma is consistent with a Wave 3 decline. This is typically the most powerful phase of a decline within any particular timeframe.

So a rollover from a bearish backtest of the 200 dma should see another drive down, a 5th Wave, before this particular leg is over.

The waterfall decline following the backtest of the 50dma was roughly 90 S&P points. A 50% retrace ties to around 1385 to 1390. If this scenario plays out a measured move decline of a similar 90 points projects to around 1300 S&P. This is right between our key 1325 target (360 down and the Quarterly Swing Chart low) and the June low around 1270.

In order for the anticipated squeeze on Friday to play out, a decline below Thursday's low, was by definition, needed to qualify for a reversal day for the market powers that be to get technical tongues wagging.

A 10 min SPY shows an explosion higher on the second attempt to knife back up through Thursday's lows.
The SPY may have traced out a short term Inverse Head & Shoulders with a possible projection to around 138.50. This ties to the above 1385- 1390 idea on the cash.

AAPL's reversal led the rebound on Friday.

Friday morning's report noted that 526 ties to November 16th. Note the large range break on the 10 min below 526 which led to a waterfall decline to 505. Interestingly 504 is 90 degrees down from 526. So, 504 is 90 degrees square November 16th. I neglected to point out that 504 squared Friday's date. Be that as it may, AAPL may have scored a nice time/price square-out on November 16th/504.
Was the 505 low close enough for government work or will AAPL flush the stops with a nominal undercut of Friday's low before another impressive reversal?

Note the Topping Tail on the 10 min prior to AAPL's quick reversal. This mirrors a Bottoming Tail or Lizard buy signal left on the dailies. Note the AAPL Crash began when a Lizard buy signal in October was violated.

AAPL's 10 min shows that upside continuation will trigger a short term Rule of 4 buy setup. In addition, AAPL may have carved out a short term Inverse H&S that projects to around 550-555. Remember that 555 is an important 540 degrees down from high (360 plus 180). Consequently, 555 is opposite the 705 price high.

A declining daily channel in AAPL shows 550-555 ties to a test of the upper channel.

Conclusion. The market looks like it hit a small low for now, but it will depend upon whether the big stocks like AAPL and Google (GOOG) go back down again.

AAPL is the key and has probably found a short term low, plunging through many viable targets and regaining 526 on the important Friday weekly close. AAPL's reversal occurred into the 354 day lunar cycle noted in this space last week from its big low November 25th-28th last year and its big 4 year cycle low from November 2008. But there have probably been so many players buying AAPL all the way down at potential targets that the stock is waterlogged with big resistance at 555.

Click to enlarge

While this week could have marked major climax selling in AAPL, which often times clears the way for a new leg up, I think it is just as likely that the vast majority AAPL holders are long term holders and remained married to the stock on the way down and that many market participants bought into AAPL below 600 and continued to buy. If so, there are many bodies buried above at higher prices creating substantial resistance. So while AAPL reversed, it probably marks a short term selling climax rather than a major selling climax.

The market may attempt a 3 to 7 day rally into the end of November but I think the big sellers and hedge funds will return to hit bids before December in front of the real Cliff, which is Obamacare Cliff, and the effect it will have on the economy which is not going away.

Throughout the summer and into September we showed a chart of 1912 and the 100 year cycle which peaked in early October. A rally into the end of November ties to the 100 year cycle from 1912 which saw a sideways to up rally into the end of November and rolled over followed by two hard years down.

Since our top on this 100 year cycle in early October 1912 also coincides with the 10 year anniversary of the 2002 low and the 5 year anniversary of the 2007 high, we've seen the power of this confluence of cycles demonstrated and until proven otherwise, the idea of a new bear leg down in keeping with the false breakout prior to the 1973-1974 bear market is on the clock.

Strategy. Europe will probably open up strong unless the Middle East blows up. The likelihood is a few days of rally with the possibility of the 3 Day Chart turning up. If the 3 Day Chart turns up the subsequent behavior will be critical to observe.

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