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Swoon or to the Moon?

Jul 02, 2013 8:32 am Print Print

In an early note Monday, we asked whether an up opening spike for the week could be a mirror image to the down opening spike last Monday that saw the S&P plunge 30 points prior to the largest multi-day rally of the year in front of quarter-end.

A 10-min SPY for Monday shows a first hour high and a rollover into the bell.

The DJIA was up 174 points at its high but closed up only 65 points.

A daily SPX shows the index failed and tailed: it failed to close above its 50 DMA and tailed off following a Pinocchio of this widely-watched moving average. The SPX relinquished the lion's share of the day's gains as it tagged a 50% retrace of the decline off the May 22 high to the June 24 low at 1624/1625.

The pullback from Monday's highs came after the Weekly Swing Chart turned up on trade over last week's high. This is the first turn up of the weeklies following the outside down week from the week of 6/21, the summer solstice.

If this is a relief rally, the turn up on the weeklies will define a high. The behavior here is critical to observe.

In addition, as you know, significant turning points often occur at the end/beginning of quarters. We are at the beginning of the third quarter, which is 180 degrees in time from the major impulse on January 2.

Was Monday's strength a setup to paint the tape prior to a further sell off, or was the strength (at least the early strength) a sign of genuine momentum to follow?

If it is a sign of genuine momentum, the SPX should recapture its 50 DMA in short order. Otherwise, the opening strength to the new quarter may be a misdirection, just as the plunge last Monday was a fakeout and marked a low.

If the recent sell-off was a bullish pullback, I think 1600 should act as support. 1600 ties to 90 degrees up in price.

I think this week marks a major turning point. The odds are the turn, whether to the upside or downside, is a big one.

Last week, I had somewhat of an epiphany when giving a consultation to someone who had purchased a Square of 9 Wheel.

One of the factors leading to my forecast of a major top at 1576 SPX in October 2007 was that 1576 is precisely 6 squares, or revs, of 360 degrees up from the 2002 bear market low at 769.

I'm sure you're wondering what level is 6 squares up from the 666 March '09 low. The answer is 1430.

Note the deep pullback from the early April 2012 high from 1422, just below the key 1430 level. You may recall that the first week of April is 90 degrees square 1422 for a square-out that was identified in this space at the time. Following the action off the high, I suggested that it looked like the high for the year could be in. The SPX slid 155 points into early June.

However, a breakout to a new high occurred in September on a run ABOVE 1430. But, the new high and breakout over the key 1430 level was short-lived and looked like a failure as the index declined to as low as 1343 in November.

The epiphany I am referring to is the explosive move in the first week of January that saw an authoritative capture of 1430.

In other words, the 'second mouse move' over 1430 got the cheese and the S&P was telegraphing momentus momentum. The likelihood was that the explosion above 6 squares up from 666 implied a new high above 1576.

Why? The next rev of 360 up (1 square up from 1430) is 1585. The next rev of 360 up from 1585 is 1748.

I think we have to consider both sides. In other words, arguably, a bull case can be made that the recent decline was a bullish backtest of this key 1585 'square'. While the SPX 'flushed' out the 1585 level in June, it only closed below 1585 for ONE day, June 24.

So this is the bull/bear tug of war the SPX is in as the market crosses the mid-point of the year. Moreover, we are 40 days and nights of completion from the May 22 high. This is the time frame when the market should begin to rollover with conviction into the Gann Crash Window 55 days from high IF it is going to do so.

In addition to this week being a Master Square in time because the first week in July aligns with 1576, the first week of July is also the historic low in 1932. July 1 was also the major higher low in 2010. Is it possible that this was a 'dividing point,' a mirror image plane with 3 years elapsing before nearing the primary high in 2007 and 3 years later being July 2013?

Will the S&P rally up into the July 19 anniversary of the 2007 primary high or waterfall into it?

It looks like the division bell is 1600/1606. 1600 is 90 degrees up from the recent 1560 low while 1606 is 180 degrees down from the May 22 high.

If the SPX is going to have a waterfall event into mid to late July, a break of 1600 should be the tell. A break of 1585 should see downside acceleration. If last week was another significant low prior to a leg up into the 1700's, the S&P will hold 1600 and certainly 1585 and recapture its 50 DMA sooner rather than later.

Conclusion: The S&P may not rollover immediately despite Monday's Topping Tail. If it has a downside date with destiny into the third week of July, an ideal date to show it is vulnerable may be the seventh day from low, which is Wednesday. Markets often pivot on the seventh session. Arguably, with Monday's fizzle, the market may have already squandered the idea of a Follow Through Day, with a big gain on substantial volume on the fourth to seventh day from the low.

In addition, Monday's momentum was suspect because the idea of powerful upside follow through came on the heels of what was already the largest 3-day rally of the year, leaving the tape vulnerable to profit taking yesterday from well defined resistance.

Of course, the market could regroup and consolidate and not tip its hand into important economic data on Friday.

I think the important thing is that a rollover from this juncture will occur from a third lower high, which is what I refer to as a Power Surge pattern because often times, third lower highs tie to waterfall events. This coincides with the time count from the May 22 high, which unless a higher swing high is made, also may be telegraphing a June Swoon.

Strategy: If the market breaks 1600, we will look to buy the SDS or SH, or short the SPY.
No positions in stocks mentioned.



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