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The Big One?

Jan 27, 2014 9:03 am Print Print

We sailed for parts unknown to man
Where ships come home to die.
No lofty peak, nor fortress bold
Could match our captain's eye.
Upon the seventy seasick day
We made our port of call.
A sand so white, and sea so blue,
No mortal place at all.

- Procol Harum, "A Salty Dog"

The Black Monday crash in 1987 followed serious declines on the previous Thursday and Friday that broke support. Since then there have been several instances of hard-down Thursdays and Fridays none of which perpetrated a crash the next Monday.

The Working Group, formed after the 1987 crash when President Reagan purportedly said, "I don't know what that was but don't let it happen again," has their marching orders.

But, I can't help wondering if this is The Big One and if a gorilla is ringing the doorbell, whether the Fed has any bananas.

Whether or not today sees a further waterfall decline, if a pernicious wave of selling lies ahead, does the Fed have anything left in its arsenal to prevent it?

What I mean by The Big One is whether this is the beginning of a new bear market or a new bear leg down in the midst of a secular bear market like that which followed the intervening 5-year rally into 1937. Or, like the intervening advance in the secular bear market of the 1970s that produced a new high in January 1973.

Despite that, the major indices have exceeded their 2000 and 2007 peaks, it is not unusual to see new highs within the context of a continuing bear market.

Could last week's decline be the kickoff to "IT", a third leg down toward the 2002-to-2009 lows or lower? Remember that markets often play out in threes, and if the SPX has carved out a 13-year Megaphone Top (as depicted several times in this space), and if secular bull markets typically run for 18-to-20 years, then theoretically there is a better than average likelihood of a third leg of a secular bear market playing out over the next few years. Whether such a decline will see a descent below the March 2009 low nobody knows. Only those selling snake oil will purport to know that the market MUST break the 2009 low.
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It is worth considering that the secular bear market that was finally complete in 1942 found a low 100% above the level of the 1932 price low. At the same time, the decline from the 1937 peak was nearly 53%.

A 50% decline from the recent 1850 record SPX high ties to 995. There is some good symmetry inasmuch as 995 ties to the 1011 major higher low from July 2010.

That said, as we offered earlier this year, the market may be on the precipice of the fourth turning of the 80-year cycle. This rhymes with the return of Uranus cycle of 84 years or so and the 1929 top. This week and the first week of February, we will be 1013 months from the 1929 peak. On the Square of 9, 1013 ties to March 6. So, there is some interesting vibration here.

To recap briefly, the last resolution of this 80-year or so cycle was the Great Depression. 80 years prior to that was the Civil War. 80 years prior to that marked the Declaration of Independence and the Revolutionary War. 80 years prior to that was the founding and formation of the THIRTEEN Colonies. The 13-year cycle has been preeminent in the US stock market.

Maybe something, maybe nothing, but the number 13 is straight across and opposite the first week of February as well. This looks like a historic week. Is a major downside move beginning 13 years after the March 2000 top?

I've said it often, but it is worth repeating, while I am not an astrologer, the number 13 is important in the horoscope of the United States. The Sun at 13 degrees of Cancer near the mid-heaven of the US horoscope seems to make the number 13 very significant for the United States. On the great seal of the US there are 13 stars above the eagle, 13 stripes on the eagle's shield, 13 olive branches in the eagle's right claw, 13 arrows in the left claw, 13 steps to the pyramid, and 13 letters in the motto "E Pluribus Unum."

While symbolism and astrology may seem at odds with the financial markets, it is worth considering the following quote from Benjamin Franklin in 1751:
Astrology is one of the most ancient sciences, held in high esteem of old, by the wise and great. Formerly no price would make war or peace, nor any general fight a battle, in short no important affair was undertaken without first consulting an astrologer.

Benjamin Franklin was the most respected and most famous person in Colonial America. Few realize Franklin was also the founder of the Masonic Lodge in the colonies, and he used the Free Mason organization to help build support for the American Revolution. Franklin was America's greatest astrologer. When Benjamin Franklin picked a date for America's Founding Fathers to sign the Declaration of Independence, it is unlikely that date was chosen by happenstance.

The first week of July is straight across and opposite the end of December and the beginning of January. This time period and the periods 90-degrees square, which are early December and early April have proven to be pivotal in the US financial markets.

For example, the major low following the 1929 crash was in the first week in July 1932. And obviously early October has proven pivotal in the markets several times in the last 13 years, not least of which was 2013.

So, the record high on the SPX and the DJIA occurring on the last day of 2013 may be significant.

Not all vibrations and square-outs are created equal of course. W.D. Gann stated that all major highs and lows were square-outs and vibrated with previous major highs and lows. But while all major highs and lows are square-outs, not all square-outs are major highs and lows.

However, when pattern and cycles converge and combine with time-and-price harmonics, the chances are something significant is occurring.

We walked through the ascending wedge on the RUT and the number vibration on that index last week. Additionally, the SPX may have carved out a 3 Peaks and Dome top.

As offered above, not all square-outs are created equal. It is the action subsequent to a square-out and cycles that counts. Last week, the DJIA shed nearly 600 points. It was the worst week in the SPX since June 2012 roughly 1.5 years ago or 540 degrees in time. Long time readers will recognize this 540 degree time frame (or price movement) as a true square or cube (90 degrees X 6 sides = 540 degrees). Will this decline prove to be different that the June 2012 low, which was 9 weeks in duration? Every selloff since the one ending in June 2012 (which was 9 weeks long) has proved to be shallower than the May-June 2012 decline. Consequently, if the current sell-off exceeds 9-to-10 weeks, it will be an important overbalance of trend time wise. Interestingly, 9 weeks from the end of December high takes us to the first week of March. Of course, early March 2014 will be the important 5-year anniversary of the 2009 low.

IF the market declines into early March, it is possible for another low to be setting up. Even if a new bear market is unfolding, it would not be surprising for the market to stage a rally attempt if it should decline into this time period.

Last week, we walked through the setup for the SPX to be magnetized to 1750 into March 6. Remember that 1750 (SPX) is 90 degrees square March 6. Since the 666-667 low is also 90 degrees square March 6, by definition 1750ish aligns and vibrates with 666.

The way things are shaping up, it looks like the important 1750 level could be seen well before the first week of March -- assuming we get downside follow-through. Even if the market doesn't accelerate lower from here, the possibility remains for a test of this 1750 level prior to March, a rebound and a test into early March for a possible "W" bottom IF the market is going to carve out a bullish correction.

Let's take a look at daily SPX from the November 2012 low that focuses in on the importance of 1750.

Daily SPX Chart:



The chart shows a well established trendline (TL 1) from the November 2012 low that was violated on the decline into June 2013. This marked a low on the one-year anniversary of the June 2012 low.

Since record highs on the indices were scored in January, this June should be pivotal as well being 180 degrees from high.

A second, less established trendline (TL 2) was also violated. This marked last October's low.

A third trendline connecting the June and October 2013 lows ties to around 1750 (TL 3). Markets often play out in threes. Will a third break of an established trendline lead to a long overdue test of the 200 DMA?

Notably, the breaks of TL 1 and TL 2 reversed after 2-to-3 days, so this week should be key if the SPX extends to test 1750.

Conclusion: Last week's article "Seven" indicated the prospects for a panic to play out in 2014. I will leave the reasons for such a panic to others to glean and concentrate on the message of the market itself. Suffice it to say that the answer to the question, "What's in the box" may be answered sooner rather than later.

The box, I'm referring to is the box that the Fed may be in.

The Fed has begun its Taper program. However, if market volatility erupts and the Fed curtails Taper and Yellen perhaps opens up the spigots even further will it help or hinder the stock market? If market volatility erupts and a deep correction descends on the market and the Fed adheres to Tapering will it exacerbate a market decline?

The important thing to remember is that panic can easily show up when sentiment, rather than fundamentals, has been driving the stock market because sentiment can quickly reverse. I think the market has largely been driven by sentiment in the last few years.

So, the possibility for panic cannot be underestimated.

As you know, there were idealized targets on the SPX at 1860-1865. While the SPX came within less than 1% of that level, in my experience, a major high (or low) almost always shows an unmistakable time-and-price tattoo.

So this past weekend, I analyzed what significance if any there could be pointing to 1850 as a major high.

The results are striking. I will show them in Tuesday's report.

Strategy: Indiscriminate selling hit the markets on Friday. Another word for indiscriminate selling is panic. The SPX knifed through 90 degrees down (1807) from high on the important Friday weekly closing basis. In so doing, it violated its 50 DMA with authority. The implication is clearly for at least a 180-degree decline, which ties to 1765. A 270-degree decline would be satisfied on a move to 1723. A complete 360-degree decline off high gives 1682, which ties to a test of the 200 DMA currently at 1690.

1850 and all the above numbers (which are factors of 1850) is 90 degrees square February 4. So, the first week of February will be important. This is roughly 6 weeks from the SPX and the DJIA high. A continuation of selling pressure beyond the first week of February indicates a minimum 13-week decline from high. If the SPX and the DJIA make new lows today, the current decline would exceed the duration of every correction since June. If new lows are scored in February, the current decline would exceed the duration of every correction since October-November 2012.

On Friday, I heard more than a few money managers say that we're only 3% off the high. That's not the point. To paraphrase Wayne Gretzky, it's not important where we've been, it's only important where the puck we're going.

Genuine corrections play out as much in time as in price. We haven't had a meaningful correction in either for a long time.

More than a few people have reminded me this past weekend that that markets don't crash right off highs. Often, in the markets, what everyone knows isn't worth knowing. The market can do whatever it wants like an 800-pound gorilla at your door.

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