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Dueling Banjos On A Hindenburgh

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Something is bubbling behind my back
The bottle is ready to blow

-Say It Ain’t So (Weezer)

The market reacted strongly to the 1379/July 19 S&P square-out, giving a 2-day, 43-point decline.

However, yesterday we sent a note out that Monday’s date was opposite 1341.

The S&P 500 (^GSPC) made an opening low around 1337, chopped around for about a half hour, and clawed its way back to regain half the decline on the bell, with a close at 1350, well above the above 1341 support.

Remember that 1340/1341 is also the midpoint of the April/June range.

So there were two reasons technically for the market to hold and bounce from a first hour low to begin the week.

Now, there are two reasons to get out of dodge should Monday’s low be violated with authority -- over the near-term at least.

So for the time being, Monday can be seen through the lens of a constructive bullish correction with a 50/50 chance of 1 more swing high.

If you look closely at the 1 2 3 Snapback To A Test Pattern from 2000 showed in yesterday’s report, you will see that arguably, there was a 4th swing. Sometimes you do get a 4th swing in the pattern within an ascending channel.

So it seems we are dealing with dueling squareouts: the first is that 1379 is 90 degrees or square July 19; the second is that 1341 is opposite July 23.

The midpoint between the two is appropriately enough, 1360, which ties to the important first rally high (June 19) up off the early June low.

Twice now, the S&P has tried to recapture that  June 19 high, but each time it has reversed sharply after failing to hold.

This 1360 level ties to first pullback lows off this year’s April high. Following the test failure high in May, it was the break of the prior swing lows around 1360 that signaled a breakdown. So while the S&P has probed into the body of the prior breakdown pivot around 1360. it has been unable to truly recapture this level for more than a few days.

I think this is the level to watch.

Every 30 days since the April 2 high has defined a turning point. May 1 was an important pivot high with the Dow Jones Industrial Average (^DJI) scoring its high of the year there.

Early June was a big pivot low.

Early July was a big pivot high and 90 degrees from the  April 2 high, which as we've been referencing, sets up the period around the first week of August as a probable major turn.

Is it possible the S&P traces out one more swing up into the early-August anniversary of the 1982 bear market low?

In so doing, it would satisfy a kiss of the upper rail of a rising channel.

Note that yesterday’s decline stopped virtually right on the bottom rail of the rising channel. Now it is possible to say that the S&P has carved out a 3-point trendline. Breaking this trendline would trigger a Rule of 4 Sell signal. Consequently, a rally attempt from here, especially one that holds up into early August say, followed by a break of channel/trendling that ties to 50% of the April/June range should issue a significant sell signal.

The big question is, if it plays out this way, will it occur on an outsized gap, galloping below support, or will it occur on a ‘walk’ through support, giving players a graceful exit?

Was Monday’s gap down a shot over the bow of a large downside gap to come, one which does not define the low of the day but is a kickoff?

A gap below the above defined 1341 level could lead to a waterfall if we get continuation. Why?

Remember our  June 27 ‘secret cycle’, roughly 1310-1320 days from November 21, 2008 that ties to 1310-1320 S&P. The important 200 dma has been rising and is currently at 1314 S&P. Snapping this level would also be a decisive break of the ascending channel containing the current price action from June through July.

Looking at the annual cycles shows that the turning points in June/July 2010 and 2011 mirror that of 2012.

In 2010 there was an early June pivot followed by an early July pivot. Following the early July pivot, there was a major higher low around July 19. The next pullback held the 50 dma, just as yesterday’s decline did (ditto the decline into July 12, 2012), carving out a rising trendline.

In June 2011, there was an early June turning point and an early July pivot as well. The first pullback off the early July pivot high in 2011 tested/undercut the 50 dma, carving out a higher low with another rally up into around July 19.  However, when the higher low failed to hold in 2011, the market water-falled  into August 8/9. A final low took until October 4, 2011.

The turning points for the last 3 years have been running very similar and point to early August as a period to watch. That said, any break of the higher low around 1310 which ties to the 200 dma indicates the market is in a weak position..

Conclusion. The cyclicals like Caterpillar (CAT) bounced back nicely yesterday, and if the banks join in and rally today and Europe is up, it suggests another rally attempt. Apple (AAPL) rebounded smartly after tagging a rising trendline, as noted in an alert yesterday. Amazon (AMZN) also bounced back nicely following a pullback toward its 50 dma. With the 3 Amigo heavyweights, Apple, Amazon and Google (GOOG) rebounding yesterday, a rally could play out with Mr. Market getting many market participants buying puts on yesterday’s plunge on the new series following Friday’s option expiration.

In short, the comeback infused hope into the market, but time is running out. The bulls failed to convert with a close over the key 1371 level last week on the important Friday weekly closing basis and paid the price on Monday, the 8th straight Monday decliner.

Friday’s failure to close over 1371 seemed to telegraph a fresh round of European troubles.

Strategy. The tape continues to be held hostage in a tug of war between macro concerns and technicals. With the VIX (^VIX) in the basement and the street long complacency, I can’t help but think that a gorilla’s going to ring the doorbell one morning.

Speaking of which, my gnome high in the Appalachians tells me the criteria for a Hindenburg Omen was triggered with yesterday’s market action. Before you run out and buy puts, that does not necessarily mean a crash is around the corner. That said, the omen has appeared before all of the stock market crashes/panics of the last generation. While it is not a promiscuous signal, the signal has also occurred without being followed by a panicky decline.

Like all indicators, it is the subsequent behavior that tells the tale. The reason for mentioning it is the picture of the cycles, which as you know indicate the possibility of a drop into October, the pattern of 3 drives up since March 2009 amidst the backdrop of more fiscal cliffs in Europe and the U.S. than you can shake a stick at.
POSITION:  No positions in stocks mentioned.