The Technical Case for a Continuing Bull Run
By Jeffrey Cooper Mar 18, 2011 9:30 am
If another deep correction plays out, it will signal a bigger-picutre bear market, not a continued new bull market.
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Child-like, no one understands
Jack knife, in your sweaty hands
-- "Hey Bulldog" (The Beatles)
In my morning report for February 22, I offered the following:
The character of the market to continuously shrug off any and all bad news and to persist in shaking off all morning declines in the face of an extended overbought condition may find the rubber band snapping back in investors eyes with no opening for longs to get out the door and at the same time no warning for shorts to get on board.On that day, the futes were down substantially before the open and there was no way to know if once again the dip would be bought or whether the Breakaway Gap from 1344 was validating a time/price square out.
Did the 70% retracement by the S&P of its bear market range send the bulls into a permanent plateau of complacency and the bears into a state of hibernation that is about to get a shock?
To recap, as I wrote that morning,
...as shown last week 1346 is straight down from the Master Square of 1576. The high at 1344 may have been close enough for government work. Literally. At the same time, 1346 aligns with the first week of January. The first week of January, 2011 was 666 calendar days from the March 6, 2009 low. The date of the high, February 18 ties to a price of 1326, near 100% up from the 666 low.Gann said to key off the weekly chart. The S&P close above this 100% threshold of 1332 for only one week before reversing.
To be sure the market barreled through more than a few potential time/price harmonics blowing confidence up the Random Walkers that the notion of predeterminism in the markets is hogwash.
Clearly I had underestimated the extent to which the market would rally in prior months, expecting the market to react to earlier cycles of time and price.
That has no bearing on the Law of Vibration and the efficacy of Gann Methodology in identifying the position of the market and in determining the trend but rather perhaps in my own feeling about the market's ability to suspend di*****elief and embrace a forced march of risk. Despite pump priming and printing presses, in the end cycles prevail typically just at the time when market timers are viewed as irrelevant.
However, the takeaway is that a cluster of time and price such as what occurred on February 18 trumps a singular square out.
Be that as it may, whatever intellectual opinion may have colored my thinking for the last few months, that did not prevent me from taking my marching orders from short-term setups from both sides, long and short alike, for the last few months in my nightly report.
Moreover, many key stocks that led on the way up topped out months ago. To wit, Salesforce.com (CRM) and F5 Networks (FFIV) detailed in this space at the time.
Are these same names that are now testing their 200-day moving averages bottoming out, or is their behavior the sign of the bear?Is this a pause to refresh and just another correction or the start of something more pernicious?
Market history reflects that deep corrections in bull trends such as what occurred from the April top into July 1 are seldom followed up by similar deep corrections over the next 12 months or so.
Consequently, if another deep correction plays out, it will signal a bigger picutre bear market, not a continued new bull market.
And this correction is deeper so far than the November correction. A chart showing the percentage of NYSE stocks below their 50-day moving averages shows that the percentage of stocks ABOVE their 50 dma’s is just 40%. Put another way, more than half of NYSE stocks are below their 50 dma’s.
Click here for the chart.
As you can see this is below the November correction threshold.
Does this "overbalance" of the reading from November indicate a change in trend?
At the same time when 50% or more of stocks hit new 20-day lows, a snapback often times plays out. This occurred on Wednesday. The snapback came in on cue.
With the S&P tagging the levels where the year opened on Wednesday, it was a likely place for a rally attempt to play out. However, with the average portfolio as reflected by the NYSE percentage above the 50 dma probably below water for the year now, will the animal spirits be able to generate traction?
With the SPY tagging the 125 strike is it bound to reach toward the 130 strike today in a textbook show of Bowling For Strikes?
Yesterday in the report I suggested that a snapback attempt would stick and not to be too eager to short into it and that trade over initial resistance near 1272 implied a run to second resistance near 1290.
The Daily Swing Chart has not turned up and will do so this morning. If a rally holds today, a higher open on Monday will trace out the first Minus One/Plus Two Sell pattern since the S&P stabbed below its 50 dma. Why? Because the 3 Day Chart is down and two consecutive higher lows assuming we get that Monday will carve out the Plus Two part of the setup.
This will coincide with a backtest of the 50 dma setting up a solid risk to reward short.
Even if the market is tracing out another bullish correction, I think there should be one more move down below Wednesday’s low, likely to 1235ish.
Yesterday, a friend sent me a chart of the S&P with the following Elliott Wave labeling. Note that another hit at the top of the channel comes in at 1400.
Recently, I mentioned that 1401 is opposite February 18. If the S&P should extend to 1401 following the current correction, it will be squaring out the February 18 high.
The above Square of 9 Chart shows that 1254 is 180 degrees down from the 1344 high. On Wednesdays surge lower, the S&P tagged 1249 intraday, closing at 1254. It is possible that this marks the low of the correction, but the level should be tested or undercut, possibly to 1235. If this is a correction in a bull market then as The Wheel shows 360 degrees up from Wednesday’s low equates with 1400 which ties to the upper end of a daily S&P channel.
Strategy: It looks like we’re in a big "B" wave up, with a big "C" wave decline to come, so I would not be long over the weekend. A decline below 1254 suggests an extension to at least 1235.
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