Mirroring The Crash In 1987.

Debt is a drug that was sanctioned by the Bretton Woods Agreement in July 1944.

The question is, if a tree is felled in the forest for the purpose of printing more dollars, does anyone hear it if they’re not in the forest?

I think it is fair to say that in denseness of the world currency system, it is next to impossible to tell the trees from the forest.

On August 15, 1971, the US unilaterally terminated convertibility of the dollar to gold. As a result, the Bretton Woods Agreement was de facto ended.

The US dollar became the sole backing of currencies and the reserve currency for member states.

The thing is that fiat monies seldom last more than 40 years. 2011 is the 40th year since Nixon tuned the US dollar into a fiat currency.

Forty days and 40 nights in the desert, the biblical day for a year?

The Fed probably relishes all the talk of deflation mongering while it is printing with both hands as the chatter holds down long-term interest rates.

But, how long will it be until the bond and stock markets begin to discount a disaster of compounding?

What I mean by that is the interest on the US national debt is now around $375 billion annually. In 2020 interest costs will double to $750 billion annually. That assumes interest rates will stay in this vicinity. That is a huge and inordinate chunk of a $14 trillion GDP. US'S creditors will probably want higher interest to make up for the increasing risk as the compounding goes on.

I can’t help but wonder if the quake in Japan will bring things to a head sooner rather than later with the Bank of Japan (BOJ) failing to show at one of US's bond auctions.

This is at a time when the dollar is already under pressure which is underscored by the recent fact that it has not responded to its traditional role as a safe haven. The US dollar seems to have lost its grip on its status as the world reserve currency given its poor price action since the unrest in the Midle East.

Moreover, there may be a huge amount of Japanese liquidation going into their fiscal year end at the end of March. If so, the Street could be caught short puts and long stocks on this "pullback opportunity" -- just like they were during the October expiration in 1987 and ensuing crash. Tuesday should be the tell if they are for sale for expiration: I would watch the big heavyweights, which were pretty much all to the downside except for Apple on Monday. If they don’t rally on Tuesday, the market is vulnerable into Friday. As offered last week, the bulls could experience a blood bath.

Monday was an important day because the Monthly Swing Chart on the S&P turned down. This is only the fourth time it has turned down since the low in March 2009. The behavior from this turndown will be important to observe. The normal expectation when a big wheel of time such as the monthly turns down is for a snapback rally over the next few days in keeping with the Principle of Reflexivity. That snapback attempt may have begun yesterday with the market recovering roughly half its losses. Maybe. Again if the expiration is for sale, all bets are off.

There is a good excuse technically for the S&P to attempt a one- to three-day rally however. The S&P satisfied a measured move at 1282 on Monday. The first move down off the 1344 high was 50 points while a similar 50 point decline off the last swing high (1332 on March 1) equates to 1282. However, 180 degrees down in price from the 1344 high is 1272 which has not yet been satisfied. A down open on Tuesday which tests toward this level could set up a reversal.

That being said the defense team is on the field. There is a lot going on out there besides the fact that the technical condition of the market is in a weak position: The S&P has closed below its 50 dma for the first time since the September 2010 kickoff. The index has also snapped a rising trendline from those lows. So, let’s keep it simple and try not to second-guess things. Surprises happen in the direction of the trend. The problem is that there is always a primary trend and a secondary trend working concurrently like twin strands of DNA. The secondary trend may have broken but the primary trend may still be intact.

The behavior this week following the turndown in the monthly chart will tell us something about the nature of the intermediate trend and the position of the market.

Let’s take a look at the prior instances where the monthly chart on the S&P turned down since the March ’09 low. The first turn down occurred in July ’09. The S&P turned right back up leaving a bullish outside up monthly bar. The first turndown in the big monthly chart found low almost immediately and turned back up vigorously signaling that the market’s agenda was higher. The next turn down of the monthly chart occurred in January 2010. The correction carved out the first Plus One/Minus Two buy set up since the low. Why? The move into February 2010 was the first pattern of 2 consecutive lower monthly lows since the March ’09 low.

Once again the market rallied vigorously into April 2010. From there the Monthly Swing Chart turned down again. However, the action was conspicuously bearish with the S&P accelerating to the downside on the monthly turndown. Another Plus One/Minus Two set up played out on two consecutive lower lows into June. However, the S&P made a slight new low on the first trading day of the new month, July, which carved out an important pattern: The lower low in July left three consecutive monthly lows for the first time since the March ’09 low. The Three Month Chart had turned down. The S&P rallied off the set up but the first turn-up of the monthly in August defined a high suggesting the position of the market was bearish. However, significantly, the S&P never turned its monthly back down. The monthly low remained the July low near 1010 S&P and has remained up -- until Monday.

Note that the move up from March ’09 to the April 2010 top was 13 months with the turn down coming on the 14th month. From the turn-up in August 2010 following the July 2010 low the S&P ran up seven months.

Typically, these six- to seven-month and 13- to 14-month counts are critical to keep count of.

What is interesting is that the range from the 666 S&P low to the April 2010 high is 554 points. Adding 554 points to the 1010 low gives 1564 which ties to the all time S&P high.

The normal expectation from the perspective of pattern would be for a textbook backtest of the April/November highs around 1225 S&P. I can’t help but wonder if after a multi-month decline that the S&P rallies up culminating in tag of 1400 and the upper channel as show completing another 13- to 14-month run periodicity from the June/July 2010 lows. In other words, following this correction, it's possible that the S&P will run up into July or August. July being the anniversary of the 2007 Initial Top and August being opposite or 180 degrees from this year’s February 18 peak.

On the Square of 9 Chart, 1401 is opposite February 18.

Conclusion: 270 degrees in price down from the 1344 high is 1235 which ties to the idea of a backtest of the April/November 2010 highs. A full 360 degree decline off the February high is 1201 which ties to a backtest of the 50-month moving average. In my opinion the primary trend will remain up as long as 1177 which is 50% of the range from 1010 to 1244 holds. It is no coincidence that 1177 ties to the 1173 low in November. Got geometry?

The Quarterly Swing Chart low for the duration of the first quarter of 2011 which has very little time to run comes in at the early October low in 2010 at 1131.84.

The quarterly range from that low to 1344 is 212 points. The mid-point of the range is 1238 which also ties to a back test of the April/November 2010 highs.

The current quarterly low for the first quarter occurred at the beginning of January at 1257.59.

It the S&P slices through 1272 like a knife through butter, it should make a beeline to 1257 and the quarterly low. Below 1257 the S&P could quickly waterfall to 1235.

Strategy: For the last few weeks I’ve reflected on the analogue of the 1987 crash with our February top this year being opposite the February 24 top in 1987. If option expiration was for sale it could be a blood bath eliciting fears of an ugly quarter end for portfolio managers. The crash in 1987 was the Monday after options expiration.

The crash in 1987 was 24 years ago. There is a compelling vibration with 24 squaring the date of February 18, the high, which squares by definition August 24, the high in 1987.

The crash in 1987 played out when a correction in October that mirrored a correction some four months prior failed to hold and the "mirror" broke. I have been pointing to the fact that the current correction has mirrored the correction in November, some four months ago. That is until yesterday. Yet yesterday was accompanied by a strange complacency just as has the devastation in Japan and the unrest in the Middle East been greeted by the market with an unusual complacency as to potential negative financial consequences. I have been warning that if the pattern of the prior correction from last November breaks, the market may go with it as it did in 1987.

Despite an oversold short-term condition, I remind myself that crashes are born not of too much bullishness but of too much complacency, and that the most bearish thing a market can do is continue lower despite it being oversold -- just as the most bullish thing the market did in recent months was continue higher despite being overbought. I remind myself that markets don’t crash directly off tops, but off lower tops. We have a lower top in place in the short-term picture from the February 18 high. Widening the lens, in the big picture, we have what may be a lower high in place from the all-time high.

If the S&P knifes and stays below 1270 on Tuesday, I would not try to catch falling daggers. The plains are littered with the bodies of heroes.