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All the King's Horses and All the King's Ben

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Communication breakdown, it’s always the same
-Communication Breakdown (Led Zeppelin)

The market always does what it’s supposed to, but never when.
-old Wall Street adage

The ‘governor' called yesterday and the market got a reprieve as it held last April's major previous high of 1422. Just barely. This morning, it looks like the reprieve has been repudiated.

The short-term bull case is that the S&P 500 (^GSPC) has carved out a textbook 3 drives to a test/undercut of its 50 dma.

The bear case is that the index shows a series of lower highs.

It looks like October is going to be the jury.

With the S&P tailing back up from a test of 1422 and backtesting its overhead 50 dma yesterday,  it looks like the jury is reconvening this morning: the 50 dma on the S&P is set to fold with conviction on a breakaway gap.

In addition, this morning’s action is set to break a 90-day rising trendline connecting the late June/late July lows.

One negative is that the bulls' hope that the S&P had traced out a 5-wave hourly decline into 1422 is being dashed with conviction this morning.

This underscores the idea that the big cycles are bearing down in earnest.

Unless the S&P can knife back up through 1450 quickly, odds are high it will bust wide open to 1370, then 1320, then 1270.

The bullish funds hope is that with a possible 5-wave decline to 1422, they’ll get a relief rally or more into what is fiscal year-end for many large funds on October 31. That Halloween date may be all too appropriate this year since funds may panic if they become scared support isn’t holding, resulting in a waterfall into the end of the month/election as funds try to cut and run ahead of each other throwing the portfolio baby out with the liquidity bathwater.

This morning, support is scarce and scared as the S&P is set to attack the Monthly Swing Chart low at 1396.56.

If the monthlies turn down on trade below this level by even 1 tick and the S&P continues lower, it can accelerate, crashing this week.

Yesterday, we offered it would be remarkable if the market mirrored exactly what happened in 1987 with a crash on the Monday following options expiration. The market is not a fine Swiss watch. An old Wall Street adage is ‘the market always does what it’s supposed to, but never when.”

The balance of the week may be ‘when’ if the market holds below 1422 and snaps 1396.

The plug could be pulled with the market terrified by what looks to be an October appearance of ‘Kaiser Soze’, a.k.a. a Reversal of a Reversal.

Yesterday’s upside reversal is set to be smashed and fast moves are often derived from failed patterns.

I would not underestimate how fast fast is; no matter what your fundamental opinions of the economy are or technically how oversold you believe the market may be short term:

1) Oversold can be become much more oversold.

2) The cycles and the pattern suggest a panic is possible.

3) In a liquidating spiral market, participants sell what they own, not what they want to. They sell what they have to. The best-performing assets the last quarter were gold/silver, AAPL, GOOG, and oil. This are all getting hit. I would keep an eye on them for guidance.

4) Surprises happen in the direction of the trend and this morning is a surprise for those hoping to bank a short-term scalp (or more) from follow-through from Monday’s reversal. If an abundance of puts were shorted for the new options cycle for November thinking that a new leg up was commencing, the wheels could come off this week if the market does not make a first-hour low and keeps going.

Conclusion. Yesterday’s turnaround was all Caterpillar (CAT) and Apple (AAPL). Whatever happens here today/this week will certainly be index-driven as all the cycles are pointing down hard.

While the big funds can manipulate the indices for a day at a time and a week at a time, there is a price to pay when time is up. A break and close below 1422-1430 confirmed by a break and close below 1396 suggests time is up.

Speaking of cycles, we’ve mentioned the 100-year cycle often going into what we believed was a big turning point for late August-September with a culminating 100 year top on October 5.

From an October 5 pivot high, the market has started down with vigor.

¼ that 100 year cycle is 1987. ½ the 100 year cycle is the Cuban Missile Crisis.

¾ of the cycle is 1937, which was the high prior to the second leg down of the Great Depression bear market.

Approximately 100 years ago Teddy Roosevelt was shot as he was running for president.

Approximately 50 years before that, Lincoln was assassinated.

Approximately 50 years after that, Kennedy was shot.

So I would not give short shrift to the resolution of the possible force and furry of cycles exerting their downside influence. Since early October, we have been seeing evidence of this cyclic influence.

What is disconcerting is that all the king's horses and all the king's Ben may not be able to put Equity Humpty Dumpty back together from a fall off his QE Wall. They’ve been there, done that. If the Fed looks powerless to halt a spiral because it’s used all its tools, the Principle of Alternation may play out: Greenspan’s Fed had the power and authority to do so in 1987. Now the picture is different -- this time around, players could panic in earnest if the perception becomes the emperor has no clothes.
POSITION:  No positions in stocks mentioned.