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Fast & Furious

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I think you move me.
Wild Thing (The Troggs)

On Tuesday, they ran stocks back up after a large downside gap. Ditto the overnight session when they moved the futes back up again leading to Wednesday’s strong up open.

Now we know why. It was a setup for a large institutional sell program -- a “buy ‘em to sell ‘em” setup. Otherwise, they wouldn’t have come apart like a dime store toy in both instances.
As my Dad used to say, “The market doesn’t move. It is moved.”
We saw a similar trap on May 22 shortly after Tepper’s ‘Taper Is Good’ comment. Someone hit the market hard on the bulge on May 22, and it has been operating under the cloud of that large signal reversal day ever since. I’ll leave it to your imagination as to whom it may have been, but the expression “they doth protest too much” comes to mind.
The good news for traders who adhere to the concept of a two-sided market is that technicals and timing are working again and that volatility has come out of hibernation.
Why would someone want to sell when everything was so honky dory in stock land, when May was doing such a swell job of turning out to pasture the nag of an old saw, “sell in May and go away”? Why would someone want to unload prior to quarter-end when May was well on its way to proving it wasn’t the black sheep of the herd and that this time would be different, or as I asked on May 1, “Will April Flowers Bring May Showers?”
Well it was different in May -- until it wasn’t. The decline that began in late May saw a plum line drop of 90 geometric S&P 500 points, leaving many of Aprils flowers wilting.
Why would a money manager(s) break ranks and hit the bids prior to month-end and quarter-end?

It’s important to remember that performance is relative and that it is relative, not absolute performance, that drives AUM.
If you can force other PMs to chase and then sell out a large piece of your holdings and then go short and hit bids indiscriminately, you can do a lot of damage to the next guy's portfolio -- especially on a relative basis.
This is a strategy that is more typically seen around quarter-end, but the market may have been ripe for this kind of a raid given the near-vertical conga line of stocks in 2013 with the sell in May ghost still haunting the deep recesses of market participants' skulls.
It’s a bull market in explanations when the supposed reasons for the run begin to fray. When the fundamentals that were supposedly underpinning the market begin to get discredited, the timers and the technicians are called in.

As for the technicals and cycles, on Wednesday, the S&P closed meaningfully below 1,624, which as you know from our note, is a Gann cycle as 1,624 is square (90 degrees) June 11 and 12. The implication is a move into the 1,570s will play out. This ties to 270 degrees down from high and coincides with the prior major top from 2007 at 1,576.

Checking an hourly SPDR S&P 500 ETF (NYSEARCA:SPY) since the May 22 high shows a close below important levels:
  1. The SPY closed below the gap from last Friday.
  2. The SPY also offset and closed below the high of the low bar hour.
  3. The SPY also closed below the high tick close from last Thursday’s big reversal day and that usually means another leg down is underway.

The best chance for the bulls here is that 1,607 holds.
Today is Misdirection Day, when the rollout of the new S&P futures occurs. So, a big down open could also trap some players and lead to a rally.
However, as the above SPY chart shows, selling pressure could see a tag of the lower rail of a short-term channel near $157 (1,570-1,580 cash). It is possible that this would mark a third drive down and a little fifth wave low for the move off the May high, but I think it would probably take into early next week, which could set up a possible rally for the quarterly options expiration.
Be that as it may, the big picture is that on Wednesday, the S&P closed below a trendline from November -- albeit only marginally so. It may be something or it may be nothing, but the second mouse could get the cheese on a second probe below this trendline, especially with the vast majority of market participants looking for a successful test.

The idea of a successful test with a higher low is in jeopardy and while a undercut low could play out, caution is warranted because the market could trigger a cascade setup breaking below last weeks lows.
  1. First and foremost, June 6 was a Gann cycle because June 6 aligns with 666, so it is a Master Square date as 666 was a major yearly low. June 6 also is straight across and opposite a price of 1,666, which ties to the closing daily high this year. In addition, June 6, 2013 breaks down into 666 (2013 adds to 6). So, there is a lot of powerful vibration there. My presumption is a break of an important cycle pivot implies lower prices and speaks to the direction of the trend. In other words, authoritative trade below the June 6 low suggests a change in the bigger picture trend.
  2. A second break below the 50 DMA could elicit further selling.
  3. A break below last week's lows would trigger a Rule of 4 sell signal -- a break of a 3-point trendline. This is often a powerful signal. While the market tailed up from the Pinocchio of this important trendline on June 6, a second break would snap the June 6 bottoming tail, and Boo could get the camembert.
  4. Accelerated momentum could take the S&P below the 2007 top of 1,576. A break below that high may be a point of recognition, where players start to consider the run up above the ’07 high was a false breakout -- like 40 years ago in 1973.

Major prior highs are supposed to be new support on pullbacks, so a break of the major 1,576 top from 2007 following a 6-month buying stampede and a possible Rule of 4 sell has all the characteristics of a bull trap.
The minimum expectation on a break of 1570 implies a full 360-degree rev down from the high to around 1,515, which would coincide with a 10% correction. That could be a bullish pullback, but it’s a break of the ’07 highs. The similarity to the pattern of other significant historic highs (which we will walk through in tomorrow’s report) that were followed by waterfall declines concerns me.
The news breaks with the cycles, and the news on the political front has been ugly and threatens to turn sentiment sour -- just as it did when the political landscape avalanched under scandals in 1973.
The emerging markets are in free fall as exemplified by the iShares MSCI Emerging Markets Index (NYSEARCA:EEM).

The bulls say that the US market is holding up, but I can’t help wonder if it will play Ketchup to the EEM quickly, especially following quarter-end. I can’t help but wonder if the generals won’t begin to play Ketchup to the troops.The Three Amigos, IBM (NYSE:IBM), Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL) were all hit hard yesterday, and as I’ve been saying, they will be downside liquidation leaders just as they were leaders on the way up.
A weekly S&P from last November shows that the index went into the weekly Plus One/Minus Two buy position last week. Although the S&P didn’t immediately respond to the setup, with the S&P driving to 1,600, it ultimately tailed up on the week, leaving a bullish-looking Bottoming Tail last week.

Note the prior weekly Plus One/Minus Two buy setups on the march up from last November.
Snapping last week's reversal and last week's Bottoming Tail is bearish and will trigger a Reversal of a Reversal. This could trigger the cascade setup.
Note the poor price action following this week's turn up on the weeklies. This is the sign of the bear. This is how you marry time and price to determine trend. In other words, it is the behavior of price within the context of the wheels of time, the dailies, weeklies and monthlies that determines the primary and secondary trend.
Importantly, the 3-week chart has not turned down since last November. Trading below last week's low will turn the 3-week chart down. If this occurs, the subsequent action will be extremely important to observe. It may be that the first turndown of the 3-week chart since this advance started, and it is bullish and defines a low. The presumption is that the FIRST time a turn down in this important chart occurs should mark some kind of a low. If it doesn’t, head’s up.
Let’s turn to a weekly chart from the 2011 lows. A trendline connecting the August 2011 low (October was an undercut) with the other lows along the advance and paralleling off the first high in late 2011 shows the recent May high satisfied a tag of the upper rail of a channel. The expectation is that the market would react from resistance; however, what I am watching is the level that ties to the 2007 top in the 1,570s.

Note that a Live Angle connecting the peaks in 2012 currently coincides with 1,570-1,580; consequently, snapping this Live Angle suggests a test of the lower rail of the channel just above 1,500. Remember that 360 degrees down from high is 1,515 and ties to the 50-week moving average.
Conclusion: In the first quarter, I offered that the market may be facing an 80-Year Cliff. My thinking was a top should be in by the end of the  first quarter. It was not. The indices marched higher into May. But just because a top came in a month-and-a-half later doesn’t mean the cliff doesn’t exist.
The percentage of NYSE stocks trading above their 50-day moving averages has fallen below 50%. In other words the more than half of all NYSE issues are below their 50-day moving averages. The weight of the evidence is leaning lower.

Is it possible that the NYA % of 50 has carved out a huge inverted Cup & Handle (bearish)? Note that the majority of stocks are below the first-quarter high and all but erased the momentum from late April.
So what does it mean? What happens if the S&P violates the first-quarter high, which coincides with the ’07 top? It may be a sign that the 13-year Megaphone Top and the 40-year cycle in my mind during the first quarter is playing out.
Yes, this time it’s different.

The stairs up, elevator down has morphed into elevator up, jumping out of a window down in the Nikkei (INDEXNIKKEI:NI225). And markets are having indigestion following the supposed free lunch served by the sushi job on the Yen. We are in a fast market. The Yen carry trade is being carried out horizontally and the furious unwinding of the tangent leverage presents a clear and present danger.
POSITION:  No positions in stocks mentioned.