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Has the Bear Come Out of Hibernation?

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The market shouldn’t have been surprised by what Bernanke said on Wednesday.

But it was.
Bernanke had already flagged the reduction in the Fed’s bond buying program on May 22, and there was an immediate reaction in both bonds and stocks.
When the market reaction is greater than presumed and when the market reacts this way to what is known, it’s probably worried about something else.
What everybody knows in the markets is seldom worth knowing.
While Bernanke said things that were conspicuously disingenuous, like that the backup in rates in May was due to the economy strengthening, which may have riled market participants. China and the overnight repo rate, the SHIBOR, which rose to 25%, also played a role in Thursday’s carnage.
While I don’t believe there was anything really new in what the Fed said on Wednesday, the Street’s presumption apparently was that Bernanke would make crystal-clear his intentions. Yet, it was more chatter out of both sides of the jawbone: if the economy shows signs of weakness, we can continue accommodation, bla bla bla.
As I stated in Thursday’s morning report, When The Jawbone Hits The Tailbone, “a break of the 50 DMA sets up a test of the monthlies.” The 50 DMA at 1,619 snapped on a gap with S&P 500 (INDEXSP:.INX) careening toward the Monthly Swing Chart low, the May low at 1,581.28. Thursday’s low was 1,584.32.

The important thing is that Fed saw the markets displeasure with Ben’s words -- if they wanted to clear things up, I can’t help but assume they could have sent their minions into do so quickly on Wednesday night.
The Fed's not doing so, leads me to think that it is possible someone big may have gamed the FOMC Cha Cha in front of today’s option expiration.
I’m sure it’s just happenstance that the SPDR S&P 500 ETF (NYSEARCA:SPY) crashed from the 165 strike to the 160 strike in a matter of hours. Right?
In other words, with the Fed failing to clarify the sense that the party’s over and the punch bowl is empty, did it pave the way for a bear raid?
If some big entity(s) sold carloads of basket programs during and following Ben’s Q&A, it could create an impression that the market was declining in reaction to something that the Fed said.
Be that as it may, the failure of the Fed to clear things up, so to speak, on Wednesday night, apparently shows a lack of understanding of market dynamics: to make any questionable statements just prior to a quad witch expiration and a week before quarter-end is remarkable. That, in and of itself, is scary.
As Boo stated before Thursday’s open, “ I love the smell of academics sitting around in the morning.”
Perhaps Bernanke’s concern was not to have a Greenspan legacy, and he was fearful of blowing another real estate bubble so a little tap on the perception brakes seemed in order.
It is human nature to fight the last war.
However, rather than just blowing a little foam off the QE Cappuccino, Ben has spilled scalding hot coffee on Hoofy’s lap.
Perhaps Ben’s language was a sort of "say hello to my leetle friend" to the President after Obama’s slap in the face earlier this week -- some middle-finger body language so to speak. A waterfall decline in stocks doesn’t do much for Ben’s legacy either, but you never know.
I can’t help but wonder why the Plunge Protection Team didn’t show up on Thursday to protect the 50 DMA, or at least the psychological 1,600 round number level where the last breakout occurred on May 3.
That said, as warned since April and throughout May, the rally could be given back at the blink of an eye because I don’t believe it had anything to do with fundamentals but was gigantic computer driven basket programs.
I think the Fed panicked in November in front of the realization that there would be no deal before the so-called Fiscal Cliff.
Consequently, clever banks/broker-dealers unleashed giant computer driven basket programs using 0.25% interest rates to borrow billions to buy stock basket programs and hedged with futures.
Those futures expire this morning.
However, with the futures at a discount, they cannot roll out to September without taking a loss, so they must sell stock or get wiped out, which is what they have been doing.
I doubt they are done, and there is a chance that they may try to gin up the futes in globex to help unwind.
So, things are still dangerous until after Monday.
The entire pattern and action at the 1,600 level is very reminiscent of the S&P 500 at the 300 level in October 1987. At the time there was a serious selling pressure on the WednesdayThursday, and Friday option expiration prior to Black Monday, October 19.
Since that time, the 1987 analogue with a crash around 7 weeks from the high has showed up a handful of times without a waterfall materializing.
While we are not 7 weeks from high quite yet, the market is not a fine Swiss watch, and it is wise to wait until Monday to see how things play out.
In addition, as I said above, I don’t think it's happenstance that the SPY slid from the 165 strike to the 160 strike in just hours. Those pesky arbs may have bought cheap calls near yesterday’s close that expire today.
In other words the market could bounce -- at least early on -- backtesting the broken trendlines near 1,600 and 1,619 in the extreme.

However, the angle of attack to the downside suggests at least a decline of one rev of 360 degrees off the high, which equates to 1,527.

Off the 1,669 closing high, a 360-degree decline projects to 1,509, which ties to a test of the 200-day moving average at 1,506.
Even in the most bullish of resolutions, given the plumb-line drop, I think the Monthly Swing Chart should turn down in June. This means trade below the May low of 1,581.28. Translation: any rally attempt prior to that turn down should fail.
Note that the S&P 500 saw a 200-point blow off in 90 days from the February pivot low (the first major higher low following the November low). This 90-day period ties to the 90-day blow off into the August 25 top in 1987. The 200-point runaway move mirrors the last-ditch run by the S&P 500 into the March 2000 top and the last ditch run into the October 2007 top.
So, there is a lot of symmetry and vibration here that indicates a significant top occurred in late May, not the least of which is that May 21/22 squares out at 1674. The intraday high was a short-lived 1,687 print while the closing high was 1,669.
Wednesday’s failure following the presumed A B C corrective rally at 1,650ish saw the market magnetized to the midpoint of the February-May range at around 1,585.
So, the good thing of late, despite all the volatility, is that the technicals and cycles have been working well here.
The important thing to remember is that if the market can stabilize here today and Monday, it can buy some time with a possible mark-up attempt into quarter-end; however, the first week of July puts the market squarely in the crosshairs of the Gann panic cycle.
Moreover, if the S&P 500 cannot recapture 1,620 and the 50-day moving average, it’s not really going anywhere.

Conclusion: A trendline from the 2009 ties to the low 1,500’s on the S&P 500 and a test of the 200 DMA. This roughly coincides with a backtest of the prior pivot highs from last September. Either the S&P 500 saw a massive breakout over a 13-year consolidation in May, OR it was a false breakout on the 40-year cycle like 1973, which satisfied a 13-year Megaphone Top. A Megaphone Top is a 5-point pattern with expanding highs and lows, which the S&P 500 may have carved out since the 2000 top. However, if the prior major top from 2007 at 1,576 is broken with authority, the indication is a false breakout with a move back below 1,500-1,475, confirming the Megaphone Top.
As the weekly S&P 500 below shows, a break of 1,500-1,475 suggests a round trip back to the November lows.

This may be the mid-channel of the entire advance from 2009. I believe there is a strong likelihood of a 20% decline off the high. This ties to 1,350, which would be an entire retracement back to the November low where the Fed panicked. So, there is some good synchronicity there with the Fed panicking at the low and at the high along with the market.
A break of the mid-channel suggests the potential for a move to 1,000. The message is that below 1,500 puts the market in free-fall territory.
Interestingly, the same 666 that defined the low when subtracted from the recent 1,687 high gives 1,011, which ties to the major higher low at the beginning of July 2010.
There is some good vibration ‘proving’ the math of the recent high. However, that does not mean the S&P 500 must crash to 1,000. However, IF a crash should occur, and the November low is snapped it may happen. Crashes are rare birds; however, if the bear is out of his cave, the indication is a leg to 1,000.
Strategy: As we noted above, the S&P 500 retraced to the mid-point of the February/May advance yesterday. There is some powerful vibration that ties to yesterday’s lows that we will walk through in the next report. Suffice to say, if the market holds here and recaptures the 50 DMA, we may have seen a first break that could theoretically lead to a culminating squeeze up into July. For that to play out, I think the market would need to hold current lows for at least 3 days.
There is some interesting symmetry from a primary top in July 2007 to a major higher secondary low 3 years later in July 2010. Three more years takes us to July 2013 and the sixth anniversary of the initial high in ’07. Will this July witness an acceleration to the downside or a squeeze higher?
POSITION:  No positions in stocks mentioned.