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Upon the seventh seasick day we made our port of call
A sand so white, and sea so blue, no mortal place at all
-- "A Salty Dog" (Brooker/Reid)

Major tuning points hit in the first week of April and again mid-April. Then, as offered yesterday, the fourth hit of a "natural" 45-year cycle hit on April 26. The S&P made a new recovery high yesterday, April 26, coming within a whisker of the 1222 inverse head & shoulder projection.

Often the market plays out in threes. We’ve seen the S&P react from an April 6 high, pull back more strongly from an April 15 high, and plunge off the April 26 hit of the natural cycle. So far the market has reacted to each turning point in April. I don’t think there's any reason to doubt the cause and effect. I think there's every reason to believe what we see, not what we hear from Wall Street, Washington, the news, or the financial media, all of which for the most part talk about what's happened, what they want us to believe, or talk their book.

While the third hit of this 45-year cycle in mid-September was followed by a key reversal day on the Autumnal equinox, the result was a short-lived decline from 1080 to 1020, my speculation yesterday that the fourth hit on April 26 could prove to be cumulative was saluted yesterday with the biggest one-day-percent jump in the VIX in 18 months.

Stocks plummeted Tuesday in their worst performance in months. The S&P gapped below the pivotal 1212 level where they settled on Monday. Remember that 1212 is opposite the 666/667 market bottom. Following the gap down, the first bounce led to an ORB (opening range breakout, a breakout above the first half hour's high) and a first hour high. The ensuing reverse ORB back below the first half hour's low saw the market accelerate. As mentioned in the last report, the pattern going into Tuesday implied a pullback toward 1195-1200 (the last buy pivot on the SPY occurred at 120), but that trade below 1195 suggested a move back to 1150-1160.

Mid-day, with the SPY near 119, I sent an alert indicating a solid risk to reward short setup would be present on a snap back to 120 SPY (the midpoint of the mornings range). The SPY bounced to 120 following which a measured move of the approximate two-point morning decline played out. In so doing, the S&P turned its weekly swing chart down on trade below last week’s low of 1183.69. The index declined to 1181.59 and closed precisely on last week’s inflection point low at 1183.69.

Because and Effect:

• Because 90 degrees down from the 1220 high is 1185/1186. Importantly, I think, the S&P signaled lower prices by closing below that level.
• Because the S&P traded to a new high for the move into the window of our 1220-1230 multi-layered resistance.
• Because the 20-day moving average acts as support in strongly trending markets and the S&P substantially snapped its 20 dma for the first time since February.
• Because of the 30-month cycle, which has been quite accurate since at least the beginning of the last decade hit in April.
• Because we're 90 degrees in time from the January top.
• Because the RUT was up 100% off its November ’08 low this week.
• Because the market pivoted hard to the downside on the seventh candle from the recent 90% downside day, leaving a second confirming 90% downside day on Tuesday.
• Because Monday’s high represents a 180 degree overthrow from the 1150 January high.
• Because historically the four-year cycle is due to magnetize the market lower into the fall along with the mid-term election-year cycle.
• Because one well known TV pundit who's been skeptical of the run-up since last November said yesterday that the market was undeniably strong and that “there was no top in sight for as far as the eye could see.”
• Because virtually all the bears are eager to cover, fearful of one more bounce before the decline starts in earnest.
• Because the market is diabolical in its perversity, it follows that it would open down out of the blue and perhaps just keep on going.
• Because surprises happen in the direction of the trend and the trend has given more than a little evidence of turning.
• Because the market has proven that it always comes back and we have all become accustomed to Pavlov’s bark.
• Because the market has proved that it always comes back, first from the bust off the 2000 top and then after the Panic of 2008, and currently (XRT, RUT, Apple (AAPL) to mention a few examples), most market participants seem aloof to the idea of elevated risk, possibly at a time when risk is extreme. Perhaps the third coming in a decade of this financial Lazarus will ultimately prove to be a charm for the bears.
  
  
• Because the S&P shows a pattern of three weekly drives up from the March ’09 low.

Because of these things, I think there's a better than 50/50 chance this could be the start of something big on the downside, not the "normal" 30 to 50 point S&P multi-day, multi-week correction.

The key level is 1178 to 1170; 1178 is 360 degrees or one revolution up from the low. A break of this "square" opens up the risk of a panic.

The low of the month was 1170.69 which occurred on April 1. The close, not so coincidentally that day was 1178.09. The market has a memory, doesn’t it?

The idea of a monthly candle that "tails" off into the close of the month of April seems fitting given the number of turning points this month. The pattern of a monthly tail in April fits the idea of a top.

January left an outside down reversal month. When the high of that bar was offset, the market went into hyper-mode with shorts scrambling and bulls gunning their favorite names into quarter end.

A monthly topping tail in April, i.e. a SECOND reversal, may not be meet with the same resurrection. The second reversal mouse gets the cheese. If the S&P settles at/near the low of the month in April, it will almost surely turn its Monthly Swing Chart down next week on trade below whatever the April low is. Why? Closing near the low of the month just ahead of a new month makes it easy to satisfy such a turndown. May 5 is 180 degrees from the important November ’09 low, so this sets up the possibility for a decline into this time frame and a turn down in the monthlies. The behavior from such a turn down will be telling. The price level is unknowable, but a back test toward the January top around May 5 sets up the possibility for a snapback if the trend has turned and if the market is still bullish another lower high.

The S&P Weekly Swing Chart tailed off three weeks ago and turned down at the beginning of the next week in the same vein as what I'm talking about above in reference to the monthly chart. That turn down on the weekly led to an outside up week. However, the index wasn't able to capitalize on the outside up weekly reversal. It didn't generate enough traction to satisfy 1222/1230 -- but it was certainly close enough. Instead, a marginally higher high on Monday defined a high with the S&P tailing off. The marginally higher high on Monday and the break below last week’s low yesterday left an outside down week. In other words, we have a potentially dangerous weekly reversal of a reversal pattern, or what I refer to as a Kaiser Soze. Often times these patterns can lead to acceleration.




The hourly SPY shows a bearish M. A. topping pattern. This is the same pattern on the dailies that put in the tops in 1957 and 2007 that I showed in July 2007. The S&P currently shows a mini version of that M. A. pattern on the dailies. Consequently, any backtest of the 1195 breakdown pivot mentioned yesterday which coincides with the underbelly of the 20-day moving average should prove to be a bearish backtest.



Conclusion: Today is a full moon so plunge toward 1178-1170 could put in a low for a rally attempt. However, as you know, reversals after large range days like yesterdays come on the heels of down opens not up opens. I'd exercise extreme caution as all stocks broke in unison yesterday and while one more push down would find many names at interesting support, if a top is in what is perceived as support is often just the mid-point of an initial decline. Ninety degrees down is 1186 S&P; 180 degrees down is 1151 and the January high.

Trading Lessons:




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