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Cycles of War and Financial Markets

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TECHNICAL ANALYSIS
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Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and nightly day and swing trading picks, click here.

Outside in the distance a wildcat did growl
Two riders were approaching, the wind began to howl

-All Along The Watchtower (Bob Dylan)

Yesterday, we looked at a cluster of cycles of war related to the Pi Cycle, which ties to the beginning of World War II on September 1, 1939.

Often, market cycles and cycles of war relate. The start of World War II came precisely 10 years after the big top on September 3, 1929.

As long-time readers know, this year also ties to the 50th anniversary of the Cuban Missile Crisis.

That called for a top in the spring, a second top in mid-August, and a downward move into October.


Click to enlarge

Note the late June low in 1962 and the zig-zag pattern up into August prior to another decline.

Earlier this year, I wondered whether the Israel/Iran standoff was echoing the crisis in 1962.

Yesterday, I saw this article about a Russian attack submarine that sailed into the Gulf of Mexico undetected for weeks.

Both of these stories may be indications that the market is vulnerable heading into a red October.

Things are coming to a head technically as well. The S&P 500 (^GSPC) has been trying to break out above the square-outs from early August through yesterday in an effort for a new high on the year, but time may be running out.

A daily S&P from July 2011 shows a tale of two channels:



The upper rail of the declining channel (red) connects the April and May highs with the current coil in price.

A failure from here looks like a Test of a Test failure pattern. In other words, the high was in April followed by a test in May and the current level may mark a test of that test.

The lower red rail ties the key late-October 2011 pivot high to this years June low.

The upper rail of the rising channel (green) is derived from connecting last year's October low with this year's June low and running an upper rail across last year’s initial August low (which ties to the series of saw-tooth tops this summer).

What is worth noting is the confluence of the two channels in two spots: at the June 2012 low and again here in August around the 1400 level.

So while the market has been impressive (some might say schizophrenic) in climbing a wall of worry on low volume, this is a level and time frame that could define a turning point.

A snapshot of a tighter section of the price action since June shows that while it appears that the SPDR Trust (SPY) cleared its ascending channel last week, it may still be entrapped within the pattern.



Remember that a measured move of the first leg up from the June low projected to 1403. It’s easy to extrapolate higher prices once you get there, but we are there.

Yesterday, the SPY gapped up and tailed off. It would have closed at the low of the session if not for a snapback in the final minutes. That said, the SPY left a Gilligan sell signal. This is a gap up to a new 60-day high followed by a close at/near session lows.

Yesterday’s reversal, following a 1-week Slim Jim or flat top, forecasts a gap down this morning. Either we will get a trend day down or the gap down will hold a first-hour low and the market will creep back up.

So, the close in Europe should be an important clue today.

A decline below last Friday’s little outside-up reversal day would issue a Reversal of a Reversal (Kaiser Soze) sell which probably leads to a test of the rising trendline around 139. Below that comes a test of around 138 which ties to Gap Window from last week.

Offsetting the Gap Window (in other words, closing the gap completely), would be a bearish sign. If the gap up was an impulsive sign of strength, it should not be closed.

Basically, this is the pattern from yesterday’s 10-minute SPY as shown below.



An early bounce to resistance this morning following what looks like opening pressure could carve out a 3rd lower high. Often, fast declines are derived from 3rd lower highs, so caution is warranted.
POSITION:  No positions in stocks mentioned.
TICKERS:  NYSE:SPY, NYSE:^GSPC   

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