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Mission Accomplished

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I have squandered my resistance for a pocketful of mumbles
Such are promises all lies and jest
Still, a man hears what he wants to hear and disregards the rest.
Simon & Garfunkel, "The Boxer"

Memory warps time, as it does the sights and sounds and smells of reality; for what shapes it is emotion, which can twist what seems clear, just as the surface of a pond seems to bend the stick thrust into the water.
-Sherwood Smith, Crown Duel

Out of the blue, like clockwork red, after a near three-fold advance, calls that the financial crisis is over are echoing down the Street.

Why now? Nearly five years off the low. Why not on eclipsing the 2007 peak?

Sometimes in that great spirtitus mondi, there is a rhyme that is irrevocable and the finger of destiny points to a sign of sentiment like a flashing red exit sign in a crowded movie theater where someone is about to cry "fire."

I can't help but wonder if "Crisis Over" is like President Bush's "Mission Accomplished."

Speaking of "signs," there is a new board game called DayTrader, "The stock market in your living room." Yes, the bubble of the late 1990s is back. Yes, the real estate bubble of the mid-2000s is back in many areas -- this time across the globe. Many who were "right" about the ultimate outcome and shorted prematurely at both junctures were carried out horizontally. Aggressive traders made out like bandits; however, many smoked their own stash, confusing their position with their best interest and overstayed their welcome. The market giveth and the market taketh away.

If we're making a high, it's natural that warning signs will be shrugged off like shouts of movie in a crowded fire. The audience has become inured to boys crying wolf. The question is which movie are we watching in this 13-year sequence: Cinderella Man or The Abyss?

The movie is miraculously engrossing and burgeoning. No one wants to end a date with Kate Upton prematurely.

No one wants to divorce stock darlings in ascension.

Last night, a Gann student, who purchased one of my Square of 9 Wheels, reminded me of a propriety, big-picture "spin-out cycle" I give to students. It hits in the first quarter.

As you know, I don't use many indicators, believing that all indicators are of second degree importance being derived from price (and volume) -- price is the final arbiter -- but I am watching one technical indicator that is close to flipping the switch. It last did so near the 2007 top, the 2010 top, the 2011 highs and prior to the drop into June 2012.

The New York Composite Advance-Decline line shows breath topped out near our first week of November turning point date while the New York Composite Advance-Decline itself scored a high on November 18, which was tested on November 29.

NYAD Cumulative Chart:

Daily NYAD Chart from October:

The above chart also shows the negative divergence between the index and the percentage of stocks above their 200-day moving averages. The important thing to note is that there has been a divergence FOR THE ENTIRE YEAR. The divergence only became more pronounced following the May top.

However, since the big low in June, the percent above the 200 DMA has been making higher lows.

There are a few things that are important to understand:

1) It is typical for the percentage of stocks above their 200-day moving averages to make a high many months before a major top. This measure made a high in 1998 prior to the indices topping in the first quarter of 2000. The percentage of stocks above their 200-day moving average dropped for almost 8 months before the S&P 500 (INDEXSP:.INX) topped in 2007.
2) Direction is as important as an absolute level. The direction of "stocks over their 200-day moving averages" speaks to the trajectory of the indices.

Interestingly, the market is flirting with the same period of duration as occurred going into the 2007 top. However, the percentage itself still reflects that majority of stocks are in hypotheitical uptrends (above their 200-day moving averages). I say hypotheitical because although more than half the stocks out there may be above their 200 DMAs, they may be carving out lower highs and lower lows above their respective 200 DMAs.

You can torture statistics to come up with whatever your bias wants to believe.

That said, a break of the 60% level would break the trend of higher lows for the percentage above the 200 DMA.

At the same time, it is important to observe that the New York Composite Advance-Decline shows a clear three drives up into late October and that there is currently a conspicuous 3-point rising trendline from the important June low.

A break of this trendline will trigger a Rule of 4 Sell in the New York Composite Advance-Decline itself. There is a better than average likelihood that this will lead to at least a 10% correction in the indices and that the June low in the New York Composite Advance-Decline will probably be tested.

A test of the closing daily June low in the S&P 500 ties to a decline to 1573. The October 2007 top was 1576. Happenstance?

Following a breakout above the 2007 top this year, we know that the decline from May to June installed a successful backtest of the 2007 high.

Let's assume that 1812-1813 has marked a high from which a decline to the 1573 June low will play out. That would be a drop of 240 points. On the Square of 9, the number 240 "points" to early February. This ties to our first quarter "spin-out cycle" noted above.

A 240-point decline from around current levels equates to around a 14% correction. It makes sense that since a 10% correction has been long in the tooth, that a reversion to the mean sees something greater than a 10% play out. Of course, this assumes the major pivots we've walked through at 1812, and theoretically, 1823-1834 hold water and that an ensuing decline occurs from current levels.

S&P 500 Square of 9 Chart:

Click to enlarge

Turning to the iShares Russell 2000 Index (NYSEARCA:IWM), we see that since its late November high, it has been weaker than the S&P 500.

iShares Russell 2000 Index:

The above chart shows that iShares Russell 2000 Index is perched on a trendline connecting swing lows since early November. A break of this 3-point rising trendline will issue a short-term Rule of 4 Sell signal.

Note what looks like a change in character between the last time the important 3-Day Chart turned down on November 20 and the most recent turn down on December 4. Both defined lows; however, the turn down from November 20 led to the 3-Day Chart turning back up and new highs on the iShares Russell 2000 Index. The turn down from December 4 has, so far, not seen the 3-Day Chart turn back up, nor has it led to new swing highs. Instead, iShares Russell 2000 Index has quickly pulled back to test its 20-day moving average.

I think a Rule of 4 Sell combined with an authoritative violation of the 20 DMA will lead to a test of the 50-day moving average. I think there is a better than average likelihood that the 50-day moving average will not be supportive if tested this time around. This is because the preceding break of the 3-point trendline and the divergence in breath noted above will probably exert meaningful selling pressure. So, there is a little cascade pattern here which could be triggered by the desire to lock up unrealized gains before the next guy.

That said, there is a natural tendency for money managers to circle the wagons until year-end for tax considerations and bonus-time and the market may drift into the end of December.

Once their mission is accomplished, I can't help but wonder if there is an irrevocable rhyme with the market holding up until the end of December 2007 prior to the plug being pulled with a vengeance in January 2008.

No matter how smart, people usually see what they're already looking for, that's all. Such is the mystery of the market.

Daily S&P 500 Chart from July 2007 through November 2008:

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Form Reading Section:

Baidu (NASDAQ:BIDU) squaring out at 190-191?

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Baidu Daily Charts:

POSITION:  No positions in stocks mentioned.