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S&P 1,698: Dream-Crusher?

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JEFF COOPER'S MARKET OUTLOOK
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Money doesn’t chase value, it chases performance.
-Josh Brown
 
When the first song goes good, it tumbles into a can-do complex. When you love a little piece of the show, it keeps affecting what comes next. Momentum is everything.”
- Art Garfunkel
 
It's been two days since last Thursday’s breakout over 1,700 with no follow-through. It doesn’t mean we’re not going to see 1,720-1,740, but the normal expectation for a breakout in a runaway market following late July’s consolidation phase would be an immediate and strong continuation.
 
The presumption was a 1-to-3-day spike with the S&P 500 (INDEXSP:.INX) being magnetized to 1,723 this week. Thursday August 8, our key potential turning-point day, aligns with 1723.
 
At what point do players turn tail and ring the cash register if a breakout doesn’t lead to follow-on momentum?
 
A trade below the prior swing high of 1,698 will probably cause some to pull in their horns. Clearly, there are beaucoup stops just below the 1,687 May high which closely coincides with the 20-day moving average currently sitting at 1,685.
 
So, it looks like a break below 1,698 will be a first sign of great expectations not materializing with the second sign of trouble being a break of the May high.
 
In our note yesterday, we mention the ‘jaws’ between rising stocks and sagging bonds.
 
On Friday, the 10-year yield left a large range outside down reversal. IF the yield should climb back up in short order, offsetting Friday’s high yield of 2.73%, there is a strong likelihood this will indicate a acceleration of rates to the top side with the yield on the 10-year triggering a little Rule of 4 Breakout on a trade over the June, July, and August highs.
 

 
As you may recall, we have an outstanding projection for the yield on the 10-year to head to around 3.5%, which ties to a 360 degree move off the low.
 
Note that we are in the vicinity of 90 degrees off the last major swing low in the 10-year Treasury Note Interest Rate (INDEXCBOE:TNX) from early May when yields began to pulse higher.
 
If yields are not topping out, the indication is that they may be poised to accelerate again from a high level 6-week consolidation.
 
I think 3% on the 10-year interest rate could be the tipping point for stock players.
 
Note that the primary spike high in 10-year interest rate occurred on June 24, the day of the reaction low in stocks some 150 S&P 500 points lower.
 
This is not an economy that would tolerate high rates without a lot of things breaking down.
-David Levy
 
On Monday, the S&P traced out its narrowest range day since the June low. I believe the S&P 500 Volatility Index (INDEXCBOE:VIX) is at its fourth lowest level since the 2007 peak.
 
While the VIX stayed that low until the end of February 2007 and the year was higher with the S&P gaining 7%, it then fell 57%. Is this daily contraction in the S&P a fractal in the big-picture contraction in the VIX prior to an explosion in volatility? Is this the calm before the storm?
 
Checking a one-year S&P from the important June 2012 low, there have been two corrections, indicating a possible fifth wave culmination of this particular rally phase could end at anytime. A decline below the May closing high of 1,669 should signal a trend change confirmed by a break of the 50 DMA now at 1,650.
 

 
This 1,650 level looks pivotal because it represents the breakout level in the current rally.
 
While there is a trendline (red) connecting the September 2012 top and the late May 2013 top that allows for somewhat higher prices, which may tie to our idealized 1,723-1,739 zone, the upper rail of a channel (green) has been tagged.
 
Note that a Live Angle (blue) also coincides with the rising red trendline connecting highs on the one-year cycle.
 
Note the lower rail of the channel ties to the low 1,600s.
 
If the S&P should overbalance the largest correction since the June 2012 low (131 points), maximum defense should be employed.
 
Interestingly, a decline of 131 points off a possible 1,739-zone ties to 1,608, so there is some good vibration at work, suggesting the possibility of somewhat higher prices from here.
 
From the early June 2012 low to the early January 2013 pivot is seven months. From early January 2013 to early August 2013 is another seven months. The seventh bar on any time frame is often a reversal or an acceleration.
 
There are numerous reasons to suggest a correction is around the corner. It will be the nature of that correction and the behavior of the market on the first rally attempt that will tell us what kind of trend change we’re dealing with -- if one shows up.
 
Last week, one of the old lions of technical analysis stated on a financial network that it is obvious that since the market is a discounting mechanism that it is looking ahead at good times for the economy.

Really? What was the market discounting in October ’07? A crash to the moon? What was the market discounting in March ’09? A rocket to oblivion? Never underestimate the tendency of folks to talk their own book, or to focus on where they are invested emotionally,  whether consciously or not.
 
It does feel the market has something on its mind right here and may be stalling out just above 1,700, a level which is 90 degrees square May 22, the prior high.

Wouldn’t a Gap & Go to the downside below the 1,698 breakout line from last week be interesting with the vast majority of players waiting for the breakout to extend?
 
I can’t help but be reminded that the October ’07 high, was a nominal 20-plus S&P points above that year's primary July high roughly 3 months prior while the current high is also 20-plus points above the May 2013 high just shy of 3 months prior.
 
I can’t help but wonder whether the calls for S&P 2,000 with the index at 1,700 rhyme with the calls for Apple (NASDAQ:AAPL) to hit 1,000 when the stock was at 700. Is 700 Apple equivalent to S&P 1,700?
 
Conclusion: Historically, a creeping rally following several weeks of basing within the context of a persistent multi-month advance sees a big spike of 2-3% that burns the buying out, if the rally is culminating. If last Thursday’s breakout was the real deal, they shouldn’t go down much with short-term support being 1,698 to 1,695.

There are a cluster of major cycles we have walked through that tie to Wednesday and Thursday. This time period also ties to pivots in many momentum stocks such as Tesla (NASDAQ:TSLA) to mention one: 145 is 90 degrees square August 7-8 on the Square of 9 Wheel. Baidu (NASDAQ:BIDU) left bearish Train Tracks on Monday following an approximate 50% advance in a month. Qihoo 360 Technology (NYSE:QIHU) (we flagged its weakness in an early alert on Monday) pulled back following a 100% advance from its May breakout. Zillow (NASDAQ:Z) tailed off following a measured move off its early July breakout before a late rally retraced 50% of the day’s range.

Zillow Charts:
 



 
Daily TSLA from May:



Daily BIDU from July:



Daily QIHU from May:


 
The bottom line is that the last theoretical top in this time period is due this week somewhere over 1700 as flagged over the past month.
If the indices hold up, the likelihood is they will extend into the August 25 anniversary of the 1987 high to as long as September 3. In 1987, there was a big May pivot that marked a reaction low in the indices and a major top around 90 days/degrees later. This year, many of the glamour and momentum names broke out in May.
 
Normally, the current pattern ends with a spike, but there are times when there is so much anticipation, that the market just collapses on players. The May high was a Spike & Reversal pattern, so perhaps, we see the rule of alternation play out if the cycles are going to exert their downside influence this week and the indices end with a whimper.
 
Right here, momentum is everything.
 
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POSITION:  No positions in stocks mentioned.

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