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Tension on the Tape
August 9, 2012 10:09 AM
THINGS ARE COMING TO A HEAD
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A star lit up like a cigar
Strung out like a guitar
Maybe you can educate my mind
Explain all these controls
S&P 500 (
appears to be consolidating at the 1400 level. The index had a time/price square-out at 1406/1407 and August 7/8, but hasn’t really jammed the 1400 stops with authority.
It’s a wait and see and cat and mouse just below the highs of the year going into the 30-year anniversary of the beginning of the great bull run on August 12, 1982.
Let’s start at the beginning.
This time frame marks an anniversary for me as well. It was during the summer of 1982 that I joined Drexel Burnham in Beverly Hills.
I remember I got the call while I was hanging around a broker with whom I had become friendly. I had walked into a Shearson office because I had some money that was going to become available in 6 months. I was concerned that interest rates, which were near 20% for T-Bills, were not going to stay there long and I was exploring the idea of locking in the long-term bond yield to take advantage of high long-term rates when my funds became available.
The brokers I became friendly with in the Shearson office told me my concerns about yields dropping suddenly were misplaced, that yields were going to remain high for as long as the eye could see due to inflation.
They were all interested in the new S&P futures product and my broker, Mori, had a circle of rich clients who’d surround his screen every day, gambling on futures.
It was on August 12, 1982 that the
sank to its 1980-1982 recession low of 777. Unbeknownst to me at the time, this was precisely where the index had closed in January 1964, 18 years prior. Who knew a bull market would erupt that would last for 18 years?
There are a few moments that crystallize in our careers and lives. I will never forget Mori bellowing from his desk on August 13, “ I am very buuulllllish!” I had no idea what he was looking at and what he was so bullish about. But I knew that Mori was a good trader with great intuition.
On August 17, 1982, Henry Kaufman of Salomon Brothers said in a note to clients that Treasury yields had reached their highs. The market exploded and never looked back.
The market was compressed and dry kindling waiting for a catalyst. It believed it had a friend in the White House, and that Volcker would continue to keep a boot on inflation’s neck.
The market’s friend in the White House had indeed set the stage for the government getting out of the way and letting free enterprise drive the economy, and a tremendous period of economic growth and wealth creation followed.
It’s interesting that the yield on the 10-year has just gapped above its 50 day moving average going into the anniversary of the 1982 low in stocks and the high in yields.
Does the 100%-plus advance by the S&P off the March 2009 low at 666 mirror the same principles? Is the fiscal crisis over in the U.S.? Is the European crisis over? Is the market discounting that both sides will reach across the isle before the fiscal cliff? Is the market discounting that European policy makers are going to put flesh on the "Whatever It Takes Promise" and turn it into a plan on a continent where countries haven’t been able to come to terms when it counts for 1000 years?
How curious that the 1982 Dow Jones Industrial Average (
) low was 777, and that 27 years later, the 2009 S&P low was 666.
Is it anything more than happenstance that 27 ties to October 9/10 which was the low in 2002 and the high in 2007? Is it just a coincidence that 27 is opposite the first week of April and this year’s high to date? Is it merely coincidental that this year’s early April high is 180 degrees in time, or opposite last year's early October low for the year?
As you know, there are a number of cycles that could bust the market up or down this August. Is the S&P essentially double-topping for the year or is this another summer of dry kindling waiting to be ignited? Is the market front-running Jackson Hole? Only Ben’s hairdresser knows for sure.
We look at the S&P a lot. Let’s turn our eye to the
From a late March high, the RUT shows a clear 5-wave decline into early June. Since then, the count has been ambiguous at best.
The RUT remains coiled for a breakout over a closing-only trendline connecting this years highs but so far, no cigar. The recent lows appear to be a double-bottom backtest. If the RUT should break out above the declining trendline (green), it still must contend with horizontal resistance just above 820.
The big picture on the weeklies shows what could be a potentially bullish Stein & Handle pattern since 2011:
The RUT scored a new all time high in April/May 2011 (note: there is a typo on the chart that says 2012).
Note the false breakout in March this year. Is the RUT carving out a bullish smaller Cup & Handle within the context of the bigger picture Stein & Handle?
Will the second mouse get the cheese with a breakout over the current declining trendline, leading to a genuine advance?
We are in the 41st month from the March 2009 low. Six squared months up (36 months) from the low defined a high this year followed by a spill to the 200 dma.
On the Wheel, the number 41 aligns with March 6, (the date of the low in 2009) and is opposite September 9. So this is a possible vibration to watch if the market runs up into the end of August, tying to many historical blow-off tops as offered in this space this week.
The bulls would like to see a challenge of the 1422 high of the year on the Friday weekly closing basis. Remember that now, every Friday is a weekly options expiration, with the day before being a move counter to Friday’s direction of late. There is still a chance for a pullback to 1381, and 1371 in the extreme, but I would watch the behavior today on any trade below Wednesday’s low as this would be the first turn down on the Daily Swing Chart since this week's thrust over 1400. If the agenda is for a try for a strong Friday close, a turn down in the dailies may define the level from which that rally ensues.
Given the cycles in August, trade that stabs and stays below 1370 looks like a Get Out Of Dodge signal.
Since Sunday is August 12, the anniversary of the 1982 low aligns with a Friday/Monday ‘workout’. This is what played out at the low on Friday/Monday, March 6/9, 2009.
The tension is on the tape
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