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NDX Death Cross

Dec 17, 2012 7:51 am Print Print

I was lost and now I look
For the turning and the signpost and the road which takes you down
To that pool inside the forest in whose waters I shall drown

-The Devil Came From Kansas (Procol Harum)

In November, the Dow Transports were vastly underperforming the DJIA and looked like they were down for the count, leaving an outside down month.

However, a funny thing happened on their way over the cliff -- following an undercut of the October lows, the Transports ran all the way back up to a breakout above the November highs, turning their Monthly Swing Chart back up.

And now the Transports have left 3 Topping Tail days in close proximity, or what I call Charlie's Angels (3 'tails' close to each other).
The Charlie's Angels signal on the Transports suggests a false breakout. If so, the wheels could come off quickly.

At the same time, the DJIA, while also having turned up its Monthly Swing Chart back up, has not broken out to new swing highs and remains well below the October highs.

If the Transports have scored a false breakout and the DJIA dives back below its 200 dma and stays there, the wheels could come off.

As I mentioned last week, this market has a positive and a negative divergence for every confirmation bias in the book.

The entirety of 2012 looks like a cardiogram on the Transports while the DJIA may be carving out a right shoulder.

Notably, the DJIA broke the neckline of a Head & Shoulders in early November leading to a plunge below its 200 dma.
However both the neckline and the 200 dma were regained in early December.

Now the DJIA is in a key position. As it backtests the prior neckline, Friday left the third potential Plus One/Minus Two buy set up.
This backtest could shape up to be a 3rd higher low since the November 'V' low.

As you know, powerful moves often times follow 3rd higher lows.

It looks like we are set to see whether a strong open this morning will be another opening rally that is faded/sold into or whether momentum will play out from this potentially bullish 3rd higher low.

A failure to gain upside momentum today/Tuesday puts the onus on the bulls I think and suggests a larger Head & Shoulders may be playing out on the DJIA with March/April being a possible left shoulder and September/October being the Head.

A break back below 13,100 and certainly 13,000 and the 200 dma puts the DJIA in a weak position -- especially with time running out for capital gains tax sellers and no sign of resolution in the cliff talks.

Is it possible a panic plays out in the second half of typically very bullish December seasonality?

A break below 1409 with authority could see persistent selling. 90 degrees down from last week's 1438 high ties to the psychologically-important 1400 level.

That said, the S&P closed back below its 50 dma on the important Friday weekly closing basis and is set to turn its Weekly Swing Chart down for the first time since the November low.

I say it is set to do so because it closed near the low of the week on Friday and it would be a better long setup for us by my methodology if the weekly turned down and the market stabilized and turned green.

So we have an interesting set up following last weeks December 14/1429 square-out which also happens to have been 90 degrees in time from this year's S&P high.

The normal expectation for the first turn down on the weeklies IF the trend is genuinely up should be constructive price action. If the wheels come off, it's during this bullish seasonality given this set up, it's not a good omen.

Checking the NDX shows the recent high ties to a backtest of a broken rising trendline from 2011.

At the same time, the NDX has carved out a Death Cross where the 50 dma crosses below the 200 dma. The last time this happened was in the summer of 2011, and led to waterlogged market.

Note that the Golden Cross in late 2011 led to a powerful advance.

What is troubling is that the current Death Cross is occurring from a possible bearish backtest of a more than 1-year rising trendline which was violated in October.

The important 3 Week Chart on the NDX turned up on the week ending December 4 and defined a high. Importantly, this occurred 180 degrees from the June low.

In addition, the NDX may be carving out what I call a "droop" right shoulder of a Head & Shoulders Top. The droop right shoulder is usually indicative of a more pernicious selloff than otherwise.

Apple (AAPL) is the heavyweight in the NDX and Friday shows a gap below a little 3 point trendline from our key 526 level. So, the action in AAPL will be key for the NDX here.

If AAPL does not quickly offset the gap and the trendline, it looks like 470-480 is the next stop.

While AAPL is breaking down to new lows, X is breaking out above triple tops and its 200 dma. Can the cyclicals capture the imagination and lead the way up or is this just short-term shifting of profits coming out of AAPL and other over-loved stocks and finding their way into under-loved stocks like US Steel ( X)?

. Trade back below 1409 warrants caution. Below 1400, things could get ugly quickly. Only back above 1422 do I want to entertain longs for anything more than a scalp.
No positions in stocks mentioned.



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