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Mother of All Fed Cha-Cha Days or Last Tango on Wall Street?

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JEFF COOPER'S TECHNICAL BREAKDOWN
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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.

So far we are seeing, at worst, an orderly decline in the housing market.
-Ben Bernanke, 2006

Asset prices are not inconsistent with fundamentals.
-Ben Bernanke 2013
 
They say one day doesn’t define a trend. I’m not so sure. Yesterday morning, the S&P (INDEXSP:.INX) scored a record high at 1687 and closed down more than 1% off that high.

The last two times the S&P hit all-time highs and closed down 1% or more from the high were October 11, 2007 and March 24, 2000.
 
3 of a kind? They say history doesn’t repeat. I’m not so sure.
 
So let’s take a look at these patterns.
 

 
Like yesterday, the October 2007 top was a Key Reversal Day where the S&P make a new all time high and closed off more than 1% from the high. It was a Key Reversal Day because it was an outside down day with the index also closing below the prior day’s low.

Note that the last leg up on the breakout over 1490 to 1576 mirrors the 87 point leg up on the 2013 breakout over 1600 to yesterday morning’s 1687 peak. Also note, that the blow off phase from the August ’07 pivot low was a couple of hundred points which echoes the 200 point S&P leg up from this year’s late February low.
 

 
The March 2000 top was also a signal reversal bar that closed 1% of a new all time high.  It was not a Key Reversal Day as it did not close below the prior day’s low; however, it was a large range Topping Tail. Once again, the blow off into late March 2000 was as couple of hundred S&P points once again echoing the 200 point rally from this year’s late February 1487 low.
 
Yesterday, the S&P ran up to a new record high of 1687 which is 200 points off the 1487 February low before reversing sharply to close more than 1% off the high.
 

 
In Wednesday morning’s report, we suggested that a break would take out the last 3 days and that there would be no clues as to distribution or internal weakness that the market would simply exhaust itself in the blink of an eye. The only clue that works in timing a top in stampedes are analogues to the past and time/price square-outs.
 
Yesterday’s decline backtested the upper rail of a trendline and the lower rail of a steeper channel. The S&P closed just above this support. This morning’s breakaway gap looks like it is confirming the idea of a throw-over/buying climax above the upper trendline of resistance adhered to throughout 2013. 90 degrees down from Wednesday morning’s 1687 high ties to 1647/1648. Once short-term support was snapped, the S&P was magnetized immediately to 90 degrees off a high before a puny late day bounce played out. 180 degrees down from high targets 1606 which ties to a backtest of the breakout line from May 2 (the mini Cup & Handle breakout at 1600).
 

 
After yesterday’s deluge, I couldn’t help but wonder if the S&P was going to play Sell In May Ketchup with a reversion to the mean toward the 50 DMA. Currently, the 50 day is around 1588. Is it possible the S&P plunges to the breakout line near 1600 before the end of May?

While the S&P chewed through several time/price square-outs since the end of the first quarter, the important thing to remember is that when the market reacts violently (either up or down) to such a square-out, it is talking. While all major tops and bottoms are square-outs (and relate in time and price to other major tops and bottoms), it is important to know that not all square-outs are major tops or bottoms. IT IS THE BEHAVIOR following a potential significant time/price harmonic that tells the tale. Yesterday’s behavior was conspicuous.
 
So too were the square-outs in 2000 and 2007. The March 2000 top is opposite a price of 1540ish. The October 2007 top is 90 degrees square 1576 precisely.
 
As we have walked through in this space over the last week or so, 1666 is straight down and opposite a 666 (the ’09 low) on the Square of 9 Wheel. At the same time, 1673 is straight across and opposite May 21. When the S&P rolled over from an opening spike high and ultimately knifed back below 1673 and 1666, the wheels came off.
 
An hourly SPY (NYSEARCA:SPY) shows the downside acceleration once lateral and angular support at the key 1666 to 1673 level (166 to 167 SPY) was violated.
 

 
There are volumes of explanations and reasons being written about yesterday’s plunge and how it relates to what the Fed is or isn’t doing. Are they going to taper this year and if so when? As offered in this space, whatever you believe QE’s effect has or hasn’t been in the markets, whether in the last 6 months explosive rally or since 2009’s green shoots for that matter, it is the psychology and the perception of QE’s stimulus that rules the roost---especially in the late stage breakout momentum phase where it’s momentum for momentums sake.

The fact of the matter is that the market reversed BEFORE Bernanke uttered a word in yesterday’s testimony. Someone brought a portfolio to market and wanted some cheap puts into the first hour spike. Note hourly volume spike in the SPY on the first hour. Someone WANTS us to think that Bernanke was the reason for the selloff. Realistically, he said nothing new. This may look like the Taper Top, but it was an excuse sell. Once things got going though, yesterday’s decline shows how inextricably ties the idea of the Fed’s programs are to the pursuit of higher equity prices. The Fed was not the cause of the decline, but that’s the effect. In reality, the market has its own internal clock. We are 180 degrees and opposite the important November 2012 low. In addition, as you know, May 21 is opposite the November 21, 2008 crash low around the world. From 11/21/08 to 5/21/2013 is 4 ½ revs of 360 degrees (4 ½ years) 360 X 4 plus 180 = a Fibonacci 1620 degrees.
 
In addition, as offered  in this space, the 3 week of May vibrates off the pre-crash pivot high in May 2008. Late May also ties to the pivot high on the 15 year cycle from 1998 as walked though earlier this week. From May 2008 and May 1998 there were waterfall declines into October/November.
 
Price wise, from 666 to 1666 is 7 ½ revs up (of 360 degrees). 360 X 7.5 = 2700 degrees. Moving a decimal point we get 270. On the Wheel, 270 squares May 21st.
 
There were a cluster of vibrations in this time frame and at 1666 to 1673 indicating the move was exhausting itself.
 
At the same time, coincident with the froth in several stocks and reach for yield in many big cap dividend paying stocks which have rocketed like pink sheet names of late, there have been a number of calls in the last month that we are in the beginning of a secular bull market while short-shrift has been given to the notion that a false breakout on the 40 year cycle like 1973 is playing out. In other words, just as the idea of a new secular bull uptrend was being embraced, the picture may be one of a 13 year Megaphone Top or Gann M A Top with the breakout over 1600 defining a crescendo phase or ‘A’ portion of the pattern. Arguably, one can make a case that the last 7 day spike over this year’s channel is a fractal of a possible throw-over of a trendline connecting the 2000 top and the 2007 top.
 
Conclusion.
Buying stampedes always end the same way, it’s a matter of pay me now or pay me later. The bulls hope the market will offer them a graceful exit like 2007 and 2000 where there was a first break and a rally back a few months later. However, crashes don’t derive from too much bullishness, but from too much complacency when the market is oversold. Furthermore, sometimes the market just rolls over from a top, like 1929 and 1987 as offered in the recent Three of a Kind report.
 
The last leg in the market was driven up by the same heavyweight names of Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), and IBM (NYSE:IBM) and the ETFs so when these names see sellers and a portfolio is brought to market, with the vast majority owning the same names, they all have to sell or risk losing their profits for the year. The bulls could have tried to make a stand near short-term trendline support shown above which ties to 90 degrees down and yesterday’s close but that is being broken with authority this morning.
 
The ETFs are wonderful on the way up but can drive the market down just as easily when they must be unwound.
 
Bonds crashed yesterday but so did stocks. So much for the out of bonds and into stocks rotation scenario.
 
The TLT (NYSEARCA:TLT) shows a possible 3 lower weekly high from which waterfall declines often play out.
 

 
So, the idea of the ‘paper fix’ global economy may become unraveled and along with it the hoped for miracle recovery. This is the risk where the market and the central banks have seemingly become one in the same and the destruction of real price discovery have left the capital markets looking like monkeys typing out Hamlet.
 
Strategy. The process of selling the rallies and covering on the dips should last at least until month end. In a normal market, the expectation would be a backtest over 2 to 3 weeks of the last breakout line around 1597-1600 with a possible test of the 50 DMA to 180 degrees down from high at around 1607.
 
But, it may be momentum in at the 666 sign of the beast and momentum out at the 1666 sign of the beast. Below the prior top 2007 top of 1576 suggests a major sell signal.

Editor's Note: The above article 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.
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