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The Valley of Amazement

Dec 02, 2013 8:36 am Print Print

I can't help about the shape I'm in
I can't sing, I ain't pretty and my legs are thin.
Peter Green, "Oh Well"

I am the brightest light beaming from the darkest depths. A dichotomy, I am…illumination.

-Jaeda DeWalt

It can't be THE top unless it feels like 1999 is like saying, it's not a hurricane unless it feels like Katrina.
-Peter Atwater

While inflation has fallen to 1.10% in the US and 0.7% in the Eurozone, condos in NYC, London, and Rio along with artworks are rocketing ever higher.

There is a dichotomy that hangs deep over assets across the globe.

The rise in asset prices has not been accompanied by a rise in GDP. The impact of QE, be it here or in Japan, has not caused gold to shine.

Is it possible that lackluster GDP is a result of too little demand for goods versus greater supply of goods while the rise in assets is the result of the wealthy trying to protect their wealth from a debasement in money by a cadre of central bankers?

What happens if inflationary expectations, which may be partly responsible for rising equity prices, as corporations own the means to production, experience a rebalancing of perception resulting in deflationary expectations?

The overarching consideration to such questions is whether such a change in perception will result from an actual event, a catalyst, producing a waterfall in stocks or a gradual shift in perception. If change comes, will it be an elevator or an escalator?

Will there be a graceful exit or will the music of momentum and the mood of the market turn all at once like a school of fish?

The market seems to know this low 1800 SPX level -- it's been churning here since November 18. This is a level that we've thought could be a turning point all November, the 60-month anniversary of the primary low in November 2008. November is over and while betting on declines in December are the short straw, typical of the sentiment by some sophisticated market watchers are reflected by some comments I heard on Friday:

"The predicted melt-up in stocks lies ahead."

"The path of least resistance is undoubtedly up."

Perhaps, but "the path of resistance is undoubtedly up" was last heard uttered by the arrow to the air -- just before the trajectory turned.

The momentum of mood is a funny thing, especially in an ever increasingly interconnected world where things can go viral quickly and turn on a dime. If the market makes a top sooner rather than later on the heels of Twitter's (TWTR) recent IPO, will it become known years hence as The Twitter Top?

Beaucoup leverage plus high prices plus an unexpected event can cause an unanticipated shock at a time when sentiment has been frothing at the mouth at each and every pullback in the stock market.

The bulls apparently are pinning their bets on the idea that there is a lot of money on the sidelines and in the bond market that will propel stocks higher. Yet, much of that so-called sideline money may be fearful of top ticking a third run for the roses in 13 years. And, the rising trend in yields may create competition for stocks, especially if that trend accelerates. How much appetite for stocks is still to be whetted with market debt at new record highs? How many bears are there left to convert with the number of bears not having been this low since March of 1987? Last I checked, that is prior to the 2000 latte and the 2007 cappuccino.

As is always the case, it's a question of timing. And timing is the most elusive of market elements. The bull camp always seems to take the mercurial nature of timing most to heart near the top, rationalizing louder than usual near tops that the market can't be timed.

Of course the bigger they come, the harder they fall. Moreover, it is not so much identifying the turning points and timing points that is difficult, it is understanding and under or overestimating the nature of their significance. Are they intermediate term turns or big picture turns?

With that in mind, let's take another whack at where we are. Let's further flesh out the nature of what seems to be a major inflection point keeping in mind, as offered around a month ago in this space, that things look like they're shaping up for a dramatic two years up or two years down.

Are we in the midst of a continuing secular bull market or at the top of an 80-year bull market?

As the monthly S&P from 1973 to present below shows, the SPX broke out above the 2000 and 2007 tops in 2013.
Either this breakout is forecasting a continuing bull market or it is part of a huge 'M A Top' pattern and a 13 year Megaphone Broadening Top formation

Monthly SPX from 1973 to Present:

The caveat is that if a bearish fifth point of a Megaphone Top is being carved out within the context of an "A," the last leg could extend further. If the SPX does not find resistance between here and 1823 in the current time frame, it may extend to 1920ish relatively early in the first quarter of 2014.

Let's walk through the analysis. On the above chart, note that a trendline connecting the big pivot lows prior to the 2000 top tie to the 2007 top (green trendline). This includes the 1987 crash low. Now, note that a trendline connecting the 2002-2003 low with pivot lows prior to the 2000 top tie to current levels (red trendline).

In the super bull case, the March 2009 low was an undercut of the November 2008 primary low and the entire 2008-2009 bottoming process was a possible fractal undercutting the 2002-2003 bottom. In other words, the 2009 undercut is to the 2008 low as the entire 2008-2009 low is to the 2002-2003 low. The bullish big-picture implication is a big double bottom -- 2002 to 2009 confirmed by the double top breakout in 2013, a double bottom separated by SEVEN years.

This is some symmetry to this idea as noted around a month ago inasmuch as there was a major secular bull low on the 60-year cycle in April 1949, which was 7 years following the big 1942 April low.

This may not be as hard to swallow if you look at the above monthly chart as a daily.

In addition, a trendline connecting the 1987 top and the 2000 top and paralleled off the 2003 low may be indicating substantially higher prices. Ditto the green trendline that ties to the 2007 top.

The inverse is the major trendline in blue connecting the 1974 low and the 1982 low, which converge with a declining trendline connecting the 2002 low and the 2009 low somewhere around 600 to 700 S&P. If a bear market shows up, the risk may be decline that satisfies a third drive to a low and a right shoulder satisfying a possible large inverse Head & Shoulders. A bear market could exert a powerful influence where the S&P 500 is magnetized in a third debacle to around the 700s. This is especially true if the SPX is carving out a bearish A-B-C pattern from the 2002 low.

There are many indications that whether the super bull case or a super bear case lies ahead that at least a 10% if not 20% correction is just ahead.

Weekly SPX Chart:

Click to enlarge

Since a 10% correction is long overdue, a reversion to the mean could see a 20% or so reaction to around 1400 and the lower rail of the weekly chart above. Note that the upper rail connecting prior tops since the 2009 low shows there is theoretically room to run while the index is tesing a rising red trendline connecting tops from April 2012 and May 2013 highs around current levels.

In my work, if the SPX does not find a high between here and 1823 in a matter of a week or so, the indication may be a further extension to 1920ish early in the first quarter:
1) 360 degrees up from the big 1646 pivot low on October 9 is 1812.
2) 360 degrees in price up from the closing low in October gives 1822-1823.
3) What is interesting about this 1823 level is that it is straight across and opposite the 1576 high from 2007. At 1823, the SPX would be an important 540 degrees or a CUBE (90 degrees X 6 sides) above the major 1576 high from 2007.
4) We are in a potentially critical timeframe as well as the end of November and early December mark the end of the Gann Panic Window of 49 to 55 days. So, a blow-off may be culminating.
5) If the index gets much higher above current levels in time and price, the implication is it may run to 1920ish. Last week, a friend shared with me the observation that 1929 (the price not the year) represents a 262% Fibonacci extension of the range from the 1974 low to the 2002-2003 low. A price of 1929 SPX also represents a rough backtest of a Live Angle connecting the 1987 low with the 2002-2003 low as shown above (obviously this depends on the scaling of your chart to some degree).

If the traditional Santa Claus rally lifts animal spirits higher, it is interesting that January ties to the false breakout to a record high in January 1973 prior to a two-year, 50% debacle. That said, I think it is safe to say that there is no one looking for the market to sell off in December. 1973 was 7 years from the orthodox top in 1966, and 2014 will be 7 years from the 2007 top. Of course, as you know, 7 is the number of change and change often times plays out in panics. A 50% decline from a price of 1929 would tie to a price of 964 SPX. A 50% decline from 1823 ties to the CLOSING monthly low in NOVEMBER 2008 at 896.

Conclusion: 1802 and mid-November looked like a good square-out. It still may be. The SPX hasn't gone much above that in price and may have seen a few weeks of time on the side (distribution). The SPX is currently in a third drive up since last June's low of 1560. 540 degrees up from that low is 1807. 720 up is 1892. From the November 2012 major pivot low to the June 2013 low was an important 7 months. 7 months from the June low gives January.

From the November 21, 2008 crash low to our mid-November square-out is 1821 days, which ties to the full rev of 360 degrees up at 1823. So, the market may be churning until this 1823 can be satisfied.

If a momentum shows up at the beginning of the month and a big spike plays out, it is worth noting that today is 1837 days from the November 21, 2008 crash low.

The runaway move into the March 2000 top was 200 points in a matter of weeks.

Daily SPX Chart from 1999 to 2000:

A similar 200-point move from the October 1646 low that mirrors the 2000 pattern, ties closely to the above 1837 number.

What is interesting is that at the 5-year anniversary from the early March 2009 low, the SPX will be 1929 DAYS from the November 21, 2008 primary low.

If Mr. Market's agenda is a date with destiny at that 1929 vibration into the 5-year anniversary of the March 2009 low, then perhaps there will be an intervening decline soon followed by a run for the roses rally to 1929ish -- a mirror image foldback of the rally up into January 2009 and the plunge into March 2009.
No positions in stocks mentioned.



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