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Tension Is on the Tape

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Monday morning’s Daily Market Report said, “Theoretically, holding 1422 is constructive and it would not be surprising to see a 1 to 3 day sharp rally play out…”

That seems like a long time ago. One of the mysteries of the market is that even when things play out as anticipated, it seems surprising: it’s as hard to sell them today at resistance as it was to buy them at support on Friday/Monday.

That said, the S&P 500 (^GSPC) closed right on our 1460 pivot. It’s easy to say that without the carnage in IBM (NYSE:IBM), the S&P would have been higher, but it is what it is.

It does ‘feel’ like the market wants to make a new swing high just above 1474. This is what makes things tricky because a nominal new high could be a Bull Trap while an authoritative close over 1460 suggests a new leg up of 100 S&P points.

Despite IBM down as much as 12 points on Wednesday and accounting for 90 points of red in the Dow Jones Industrial Average (^DJI), the crafty expiration arbs were able to offset the loss with gains elsewhere, indicating that there is an agenda for a 145 S&P SPDR (NYSE:SPY) strike or higher for expiration. The arbs are probably short the downside strikes.

We get Google (Nasdaq:GOOG) earnings today. Recently we showed a chart that suggests a mirror-image foldback from 2007 may be playing out. So if GOOG spikes up on earnings, according to the pattern, it would not be surprising to see a Spike & Reversal play out with GOOG fizzling out in a exhaustion, culminating the run.

With Apple (AAPL), Amazon (AMZN), and IBM  under liquidating pressure as of late, if the 4th horseman buckles, it would probably be a bearish sign for the broad market.

Amazon has traced out a possible Minus One/Plus Two Sell setup on a backtest of its 50 dma. it looks like the 20/50 dma’s are set to ‘bowtie’ near the 250 price level.

Amazon has been an early leader since scoring a low in November 2008 at 35. This 250 level in AMZN looks pivotal since 5 revolutions of 360 degrees up from 35 gives 250.

In addition, 250 ties to a 50% gain off the 2011 lows.

Like AMZN, AAPL may be in the process of backtesting its 50 dma and a broken neckline of a Head & Shoulders Topping pattern.

Bonds got smacked on Wednesday as a sell bonds/buy stocks swap program provided fuel for equities. That’s the good news for bulls. The bad news is bonds are threatening to break last ditch support and a breakout in rates could impact stocks negatively. It’s not that nominal rates would not still be historically low, it’s the direction of rate movement that could cause disintermediation in the markets.

Since the high pole bar on the S&P weeklies 6 weeks ago, the index shows a pattern of alternating turn downs and turn ups in the Weekly Swing Chart. Yesterday, the Weekly Swing Chart turned back up again in concert with a turn up in the important 3 Day Chart.

Will yesterday’s turn up in the weeklies define another high?

Note the trendline connecting the major higher lows of the rally since the June low tie to current levels in the S&P.

Is it high-level accumulation or distribution going into the 25-year anniversary of the 1987 crash on Monday, October 19?

With Romney solidifying his chances following the first debate, providing more fuel for the rebound and October fiscal year-end for many of the largest funds, it may be hard to get the market down if they show continuation above 1460 after option expiration come Monday.

That said, the market is stretched short term and a 10 to 20 point S&P pullback could come at any time.

But, a break below 1422 at this point should see a plunge, perhaps a panicky one.

The above flag pattern on the weekly S&P is mirrored by the dailies on in the Housing Index (^HGX).

Some on the street are excited about the homebuilders looking poised to pivot out of a Bull Flag; however, after a 50% runup since the June low, it’s possible that HGX is tracing out a little broadening top.

There are two interesting things to note about the chart. Note the pullback following 3 drives to a high in July, which saw HGX rally back and coil, leading to an explosion triggered by a Rule of 4 Breakout.

Clearly the pivot of significance is 170 on the upside and 155 on the downside. Obviously, a decline back below 155 calls into question the breakout at 150-ish, below which suggests an extension toward 130.

Conclusion. The stock market is the focus of fascination not just because of obsession with speculation. The stock market is also a great teacher. It teaches that only the humble survive. It teaches the virtues of patience and discipline. Those who study the market and go in search of its mysteries often find that it leads to amazing self-discoveries, to philosophical and metaphysical understandings.

Above all, the market teaches us to be in the now and trade the now despite what we think the future may hold. It teaches us about cycles, that night follows day and hard times follow good times.

Whether this is a time to reap or a time to sow remains to be seen, but tension is on the tape and the cycles are lined up with the S&P sitting on the fence at our 1460 ‘square-out’ level.

It sure ‘feels’ like it wants higher, but sometimes it's brightest just before the storm just as it's darkest just before the dawn.
POSITION:  No positions in stocks mentioned.