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A Shakeout Is in the Cards

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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.

Did-did-did-did you ever wonder why we had to run for shelter
When the promise of a brave new world
Unfurled beneath a clear blue sky?

-Goodbye, Blue Sky (Pink Floyd)

As you know, I have been looking for 1430 on the S&P 500 (^GSPC) as a potential major top occurring some time before the end of August.

Yesterday, I was wondering whether Tuesday’s 1426.68  high on the S&P was close enough when I noticed the high on the S&P SPDR (SPY) was 143.09, which ties to 1430 cash.

The S&P may yet cycle up in coming days to kiss 1430 goodbye, but  remember that the market is not a fine Swiss watch.

It’s too early to tell whether Train Track Tuesday was the top, but yesterday I wrote (tongue in cheek) that Apple (AAPL) was the market.

And yesterday, AAPL spiked up, reversed lower, and took the market with it.

There are a number of technical reasons why yesterday may have satisfied the idea of a double top in AAPL, as I offered on Monday:

1) Yesterday’s report walked through the significance of 672. AAPL pinocchioed that level early on and jackknifed hard.

2) AAPL left a Gilligan Reversal Signal bar. This is a gap up to a new 60-day high with a close at/near session lows. In addition, AAPL carved out Train Tracks. Note that the signal reversal bars mirror the top on April 10.

3) This is the 14th week off the May square-out low at 522. Rallies are often reversed on the 7th or 14th week, giving a reaction or a change in trend.

4) A 540-degree move up off 522 equates to 668. AAPL closed at 666 on Monday, reversing to close at 655 on Tuesday.

Click to enlarge

AAPL’s reversal on Tuesday occurred on a substantial increase in volume following an advance on declining volume. This implies that the idea of a double-top is a legitimate proposition. Note that the July low occurred on a spike in volume. Yesterday’s top on a mirror image also showed spike in volume. So, a Jaws of Death pattern may exist with a rally on declining volume to test prior highs, followed by a sharp reversal on substantially rising volume. This Jaws of Death pattern could be confirmed on an authoritative stab back below the 644 April high.

Note that this coincides with the top of an ascending channel. It is notable that there was an overthrow of the channel in July prior to earnings, which defined a pivot high. Is the current spike another bearish overthrow that will prove to have defined a good high?

The July overthrow gave a 50-point sell-off so caution is warranted no matter how bullish you are on AAPL. A break below the 644 peak and trade back into the current channel suggests a move to the bottom rail of the channel below 600.

Often, short-lived overthrows of ascending channels define tops. Interestingly, yesterday’s Spike & Reversal in the S&P was also an overthrow of the summer's zigzag ascending channel.

Tuesday’s Topping Tail near our 1430 projection occurred on the 10-year decennial cycle pivot high.

We have noted in this space before that the 10-year decennial waterfall low on July 24, 2002 could illicit a rally to a new swing high.

The rally high off that low in July 2002 occurred on August 21-22 in 2002, so this is another reason to believe what we see -- to believe Tuesday’s outside-down signal bar. An outside-down day, closing red following a test of the April high is ugly. Despite many attempts to better the April high, it looks like the Dow Jones Industrial Average (^DJI) and S&P 500 have failed to do so. This underscores the power of the April 2/1422 square-out. Remember that 1422 squares (is 90 degrees from) April 2. Also, it is significant that 1422 is a ‘master square’. Why? Because 1422 is one rev of 360 degrees down, or 1 full square down from the all-time 1576 high.

The failure of the S&P to recapture the April high followed by a weekly reversal this week may confirm my forecast at the time that April 2nd would be the high for the year.

While yesterday scored a new INTRADAY high, the closing high for the year so far was the April 2 high of 1419.04. The closing high for this rally occurred last Friday, August 17  at 1418.16. August 17 was the kickoff of the great bull market in 1982, on the 30 year-cycle. So yesterday’s action is not something to dismiss. The road to market perdition is paved with the cobblestones of hope for one more rally.

Based on the factors of  time, price, and pattern walked through over past few weeks, the market may be in its most dangerous position since October 2007.

A Rule of 4 Sell signal will now be triggered on a break of the lower rail of the rising channel now near 1360. This ties to the 50 dma. A 50% retrace of the June low to yesterday’s high (assuming that remains the high) equates to 1347.

That said, the S&P broke out above a 3-point trendline in early August. While technically, a bullish backtest could occur toward 1380-1390, I think losing 1400 would be a psychological negative going into September which is historically the worst month of the year. A failure below 1380-ish (which ties to a break back below last year's 1370 high) would issue a Get Out Of Dodge sell signal.

Conclusion. 144 Fibonacci months ago in late August 2000, I wrote that the “market (particularly the most speculative sector, the Nasdaq) was in its most dangerous position since late August 1929."

A daily S&P chart for 2000 shows a late March high (mirroring our April peak this year), a significant sell-off, followed by a summer zigzag into late August.

A Rule of 4 Sell Signal led to a vicious 2-year bear market. Do patterns repeat? Is the market ‘ordered’? Is the market a random walk or do cycles trump fundamentals?  I don’t know if the market is in its most dangerous position since October 2007, but I do think a September/October shakeout is in the cards and that there is a better than average likelihood that a 2 year bear market will play out from this time frame.
POSITION:  No positions in stocks mentioned.