Will The Market Rollover Again?

I’ve been in the markets for 25 years and I’ve never seen anything like this. And there’s a reason: there’s never been anything quite like this.

The price action both up and down has been astonishing.

Market is doing a good job at getting traders used to the idea that 30 handles on the S&P is the “New Normal” -- that a 30-handlebar bike can be ridden. You don’t ride this kind of risk any more than a frog fantasizes he's "adapting" in a pot of water where the heat gets turned up and up until it’s too late.

On the other end of the spectrum, hope and holder investors who haven’t been driven out of the market by a decade of financial schizophrenia convince themselves they're in it for the long term. The truth is, if you lose your money in the short term, there is no long term.

On Wednesday the market reversed to sell off 25 S&P points on a rumor that China was "reconsidering" its eurozone debt. Reconsidering may be the mother of all euphemisms in this particular case. Then on Thursday the S&P gapped up 30 handles on plausible deniability of that rumor. China certainly figures in lately, doesn’t it? Seems like China carries a big stick, but isn't speaking especially softly.

This is because the two biggest currencies in the world are dependent on the kindness of strangers. Money makes power. When you depend on the kindness of strangers to keep the wolves of debt from your door, it's at the peril of becoming ineffectual. Is this the case currently with the US in our talks with China regarding North Korea and Iran? Does America risk becoming a paper eagle at a time when former paper tigers have sharpened their geopolitical teeth and are threatening more than just paper cuts? My, what big teeth you have, China.

When a nation is indebted beyond the scope of its own control, it loses manifest destiny. This is currently the spectacle in Europe. When multiple sovereigns lose the right to rule, there's systemic risk. Particularly since fiat finance is faith-based.

Volatility precedes price and volatility has begun to cast a long and ragged shadow over the land.

The market may mask risk with the phantom of opportunity, but when the market trades "in the air" and gaps to where it's going from one day to the next, there's more danger than opportunity. The notion that the Chinese word for crisis represents danger and opportunity is fallacious. Even in the land where communism has co-opted capitalism, crisis is crisis. Sometimes risk is just risk. As the financial markets presumably learned over the last few years of crisis, sometimes risk is just risk and can’t be hedged away. Danger is as danger does.

I say financial markets presumably learned that risk can’t always be hedged away because going into the April top, once again, the VIX was priced as if stocks were discounting the hereafter. It was as if Mr. Market looked risk straight in the eye, saying, “We don’t need no stinkin’ insurance.”

So what was so good about Wednesday morning? What happened that the market should explode up 30 S&P points overnight? Nothing fundamentally bullish happened. The issues haven’t changed. The only "good" thing is that China intentionally or otherwise showed how they can move world markets, and that’s a bad thing.

Going into the down draft on Wednesday, I sent out an alert wherein I reckoned that 1066 should be a bullish inflection point. Why? The pattern suggested that the S&P bounce had an agenda with higher prices over to perhaps a gap near 1115 on a backtest of the 200-day moving average. Since the S&P was rejected on Wednesday from a test of 1090 and the first move up was 50 S&P points, then from what level would an ABC or two-step measured move play out? A symmetrical 50-point rally from 1065 to 1066 would satisfy such a pattern. To wit, the S&P stopped in its tracks at 1065/1066on the sharp sell-off into Wednesday’s close.

Thursday’s 30-point gap up mirrored the 30-point gap down on Monday. What a week. Shorts were on the hook, bulls were left at the station as the train took off. The shorts had already taken the heat on the open and there was little to do other than observe the behavior of the first little morning pullback which proved to be meager. Some shorts likely even faded the open. When the market held up, the stage was set for a trajectory into the close as the full moon yesterday magnetized the market to a close at the high of the day. The S&P was drawn to a test of its 200-day moving average right on the bell. The notion of alternation suggested an ABC-type pattern if a multi-day rally was going to play out with a stab at 1115ish in contrast to the line drive, straight up move off the flash dance May 6 crash lows.

With the futures closing on their high without the "arbs" getting out, it suggests an up open before they cut and run, or at least hedging in front of the long weekend. Short-side scalps today set up better than long-side tries with the S&P up a quick 180 degrees from the 1040 low and down 180 degrees from the last swing high at 1174. The day may just go flat and choppy in a narrow range after yesterday’s thrust.

Basically, the market did as predicted, turning down the Quarterly Swing Chart on a break of the February low and then snapping back powerfully in keeping with the Principle of Reflexivity when a big wheel of time turns.

While the market is closed on Monday, foreign markets are open and you never know if the mice could play while the cat's away and the "rally is raided." Be that as it may, the Weekly Swing Chart should turn up early next week on trade above whatever this week’s high proves to be. There are a tight cluster of turning points due in the first week of June that are reminiscent of the cluster of time/price harmonics that called the April turn.

For example, one of those harmonics is that June 4 is 666 trading days from the all-time high on October 11, 2007; 666, of course, was the price of the S&P at the March ’09 low. Moreover, 666 vibrates or aligns with the date of June 6. In addition, the 2007 to 2009 bear market decline was 512 days. The "center" of the decline or the 50% point is level of the January 6, 2009 high near 940/950; 512 days from this "center" gives June 6, 2010.

With a consensus in place that the market will extend on the heels of a double bottom that's been carved out in the S&P, will the SPY backtest its 50-period moving average near 109 before a stab higher leaving a third step up between 1107 and 1120? Why do I say 1107? The range of the last swing from 1174 to 1040 is 134 points. One-half that range is 67 points, giving 1107. It's interesting that this vibration ties to the 666/667 low.

Conclusion: I don’t think I can ever remember a time where so many traders have pointed to a particular pattern, an inverse head & shoulders (bullish) pattern in the S&P which presumably projects to 1140. It may, of course, play out that way, but typically what's obvious in the markets is obviously not worth knowing. At the same time, I hear few voices suggesting that this current move up could be a "droop" right shoulder, shy of 1121, which is the mid-point of the prior bear market. I've been focusing on the first week of June since the top was confirmed as a possible low. Now it appears a three-step pattern will play out to the upside into next week. The bottom line is another lower high on the S&P will trace out a potentially ominous third lower high. Often times waterfall moves come from third lower highs.

As it happens, analogue from the waterfalls in 1929 and 1987 saw the market make lower highs around 40 calendar days from their peaks just before crashing. If the "double bottom" or neck line at 1040 breaks, the projection is to 860ish S&P. If may not play out this way of course, but given the cyclical, financial, political, and geopolitical backdrop, extreme caution is warranted at least until this period passes to see what we’re dealing with.

Strategy: As offered in mid-May, if the S&P is above 1100 and especially 1120 by the end of May it may compel a squeeze by money managers forced to chase stocks toward quarter end. However, if the market rolls over again, it's just as likely that these same money managers panic in front of quarter end, rather than lose all their gains from March ’09.