The Most Important Charts You'll Ever See

The following charts may be among the most important charts to consider, not just for the balance of 2010 but for some years to come. There isn’t one single chart that casts an inextricable shadow of concern over the market, but a message implied by the weight of evidence by all the charts below.

However, before we turn to the charts, let’s recap a bit. The market rallied much further than I would have thought off the March 2009 low that I forecast. It rallied much further and faster than imagined -- especially without the benefit of a base or without benefit of a test of those lows.

The question that should weigh on market participants minds is whether the advance from March 2009 was a reprieve rally in an ongoing bear market, an upward correction, or the beginning of a new bull market.

The charts below address this question and analyze the position of the market and pose the big question: Did the 2007-2009 bear market decline to 666 S&P come close enough to the uptrend line from 1942 to be considered a successful test? If not, then a downturn from a lower high in 2010 opens the possibility for a full test of the blue trend line (on the chart from 1870), which would call for an undercut of 666 S&P. It's not unfair to say that if three drives up from the beginning of the century culminated in 2000 and was tested in 2007, that a test of the uptrend line from 1932 could play out with the S&P returning to the point of origin where a parabolic advance began in 1995 below 500 S&P.



My tools allowed me to identify the June ’09 peak and the July low. At that time I believed that a test of the June highs would play out, but offered that if the June high was exceeded the S&P would run to September and a 38.2% retrace of the prior bear market near 1014. The S&P rallied well above 1014 to 1080ish in September and perhaps that was the message for a higher agenda despite the Key Reversal Day on September 23.

Be that as it may, in December there were multiple time/price harmonics that pointed to a topping process to begin with a top no later than mid-January and culmination in April.

At the February 2010 low I pointed out the “decidedly bullish” setup: The Monthly Swing chart on the S&P traced out its first Plus One/Minus Two Buy setup since the March ’09 low, as well as the first turn down in the Three-Week Chart since the March ’09 low. At that time I stated that an advance that recaptured the 1121 midpoint of the prior bear, and especially the January 1150 S&P high, increased the odds of a rally to the 61.8% retrace of the prior bear market rally near 1228.

The S&P scored a significant high at 1220 on April 26 at the tail end of our April turning point window. As touched on at that time, The S&P left an outside down week from the vicinity of its 200-week moving average. I believe the April 26 high will mark the high for the remainder of 2010. If a new recovery high is somehow out there this year, I believe it will be a marginal overthrow high and that it will occur before July is over. But, I think this is the short straw.



Essentially, the momentum that occurred going into the runoff at the end of the first quarter on regaining the 1150 January high, carried over into the April turning point window. However, once the S&P caved back in through the 1150 level significantly in early May, there's no reason for all those money managers and fully invested bears to be long unless 1150 is recaptured.At the end of April/early May I identified a mini daily Head-and-Shoulders topping pattern on the S&P that would be triggered on a break of 1180ish. I also warned of a possible cascade setup and accelerated downside momentum if the Monthly Swing Chart turned down in early May on a break of the April low at 1170, a break back below our old friend 1150 and a violation of the big 1121 Midpoint of the prior bear.

That cascade was the infamous "Flash Crash". In keeping with the Principle of Reflexivity after the waterfall from the turn down of the monthly chart, the S&P bounced back to revisit the scene of the crime, 1170. The return to 1170 coincided with a backtest of the 50-day moving average. It was a text book short setup as the waterfall decline had a date with destiny: The early May down draft had failed to turn down the Quarterly Swing Chart on trade below the first quarter’s low, the February low. The S&P was quickly magnetized to prices just below the February 1045 low on May 25 when the S&P left a large range bottoming tail from a low of 1040.

Last week I identified a potential pullback low going into the close at 1065/1066 and suggested the S&P should trace out an A B C or two-step rally toward as high as 1115 (where there's a large open gap from May 10). The market gapped up sharply the next morning, May 27. The S&P futures tagged 1107 on Friday morning, May 28, before reversing sharply with the cash closing at 1089. Was this close enough to the 1115 measured move projection (50 points from 1040 to 1090 and another leg of 50 points from 1065 to 1115)? Possibly. The decline from the May 13th 1174 high to the May 25th 1040 low is 134 points. Half that range is 67 points. 67 points up from last week's 1040 low gives 1104. Moreover, opposite the March 6 "vibration" low from ’09 is a price of 1111. In other words, 1111 is opposition the date of March 6. It's also interesting that this recent 67-point range up and down ties to the 666/667 price low in March ’09.

For those of you who have kept up with my reports, my view is that we're still in a secular bear market. That means that any rally peak implies high risk. Everything in life, including the market, has a cycle. I believe we're reacting to a long cycle of 80 years (or the Biblical 40 days and 40 nights). The underlying element of the cycle is a long wave of debt buildup followed by a period of debt destruction. In the sequence of events in any cycle, especially the large cycles, each event feeds off the preceding event.

Currently, there's extreme risk in my view as the popular indices may have traced out a second higher low on the monthly charts. Two years ago the market carved out a first lower high in May 2008 and crashed. Is it possible a second lower high two years later will define Crisis 2.0 and another crash?

Checking the daily chart of the S&P shows that the flash crash occurred from a first lower high following the April 26 top. The next waterfall began from a second lower high. The fastest and most powerful declines often times play out from third lower highs. It's entirely possible that the S&P is rolling over right here from a third lower high off the April 26 top. There's a high degree of danger here as this third lower high on the dailies is occurring in the time frame where the markets may have rolled over from a lower high on the monthly chart, a corrective rally within the structure of a long-term secular bear market.

I don’t know when I can recall so many astute technicians/traders pointing to a potential short-term Inverse Head-and-Shoulders pattern that could project to 1140. However, in the markets, what's obvious is often obviously not worth knowing. Many of these same technicians are bearish looking "to play" the pop to 1140 anticipating a long, broad right shoulder to be carved out over the summer. Perhaps. But I haven't heard anyone point to the possibility that the S&P has already traced out a "dwarf, droop" right shoulder. This is the same pattern that existed prior to the crash in 1929. While some are trying to dance between the volatility and dodge gaps on both sides, looking for somewhat higher prices, the viciousness of the downturn from the end of April seems to underscore the validity of a retracement high within an ongoing bear market. The market may in fact hold up and rally somewhat more, but the important point to consider is that the market doesn’t owe us anything more to the upside if the cycles have collided. And, the substantial number of time/price harmonics identified going into April appear to ratify the significance of the May Mayhem.

In fact, this was the worst May since 1962. It was called Black Tuesday in May 1962. It was a day I will not forget because it was a day when my dad, who had retired in his 40s a few years earlier, went broke. He was on margin and lost more than he had that day. He was with my mother that morning who was having an operation to determine if a tumor was benign or malignant. It proved to be benign, but the same brokers who had encouraged my dad to be on full margin "because you can make that much more" sold him out as each stock he owned declined.

This is the story that starts off my first book, Hit & Run Trading. It was 48 years ago. I was just a kid. But the cycles weren’t through with my family yet. Having retired to California after selling his business, my dad had to start over and we had to move back east. The moving van with all our belongings, including impressionistic art that my folks had collected, caught fire in Needles, Arizona. Nothing was salvaged.

I feel particularly "tuned into" the risk in the current market. It may not play out that way, but you decide for yourself.

Is it mere happenstance that 48 (as in 48 years ago) aligns with the 1220, April 26 price high, and mid-May, when the market proved that the flash crash wasn't a fluke or an error? The market declined into the fall in 1962.Early this year I showed the chart below of the Dow Jones Industrial Average from 120 years ago, suggesting the cycles would exert significant pressure after May 16. The implication is a return trip to where the advance started in March 2009. Is it possible?



Above, I mentioned the 80-year cycle of 40 days and 40 nights. As it happens, this week the market will be 40 calendar days from the April 26 peak. This is the same count where the market in 1987 and 1929 found lower highs following a prior peak and began to accelerate lower again.

This week sets up a major turning point for some of the following reasons:

1. The end of this week is 666 trading days from the October 11, 2007 all-time high (666 being the bear market S&P low).

2. The prior bear market was a range of 910 points. Half of that gives 455. Converting price to time, 455 days from March 6, 2009 is the end of this week.

3. The prior bear market was 512 days. The midpoint of the range of the advance off the March ’09 low is 943, which was the high one year ago, on June 6 2009. This is the "center" of the advance.

Counting 512 days from the “high before the low” or from the January 6, 2009 pivot high at 943 gives June 6, 2010. This, of course, is the one-year anniversary from the June 6 initial rally high off the low, which also occurred near 940/950 S&P.

The rally from the March 2009 low lasted 13 months. A Fibonacci 13 months. The advance from the 1987 August peak to the 2000 secondary peak was 13 years. Thirteen years from the advance from the late 1994 pre-parabolic low gives late 2007. Two years after the first sequence in 2000 defined a low. Two years after the second sequence defined a low in 2009. Interestingly, 13 years from the important low in October 1974 was October 1987. So, the question is: Was the March 2009 low another big low like 2002/2003 with the second half of 2010 being a consolidation like 2004? The behavior of the swing charts and the cycles going forward will enable us to determine the answer to that question. However, the fact that the cycle low in 2009 broke below previous cycle lows for the first time since 1974 suggests caution until we see what we’re dealing with.






We're at an important inflection point and not all inflection points are created equal. The S&P left a bottoming tail last week. It's poised to turn its Weekly Swing Chart this week on a trade above last week's high. The behavior at that point will be crucial.

To sum it up, the S&P topped in April in the widow of our turning points at a downtrend line from the July 2007 peak. This coincides with a return back to the pre-crash breakdown levels and a weekly live angle channel. A break of last week’s low opens the potential for a move to 50% of the advance off the March ’09 low, or 950ish S&P. However, a Head-and-Shoulder measurement counts to as low as 860ish (1220 head, 1040 neck gives 180 points, 180 points off 1040 gives 860).

Conclusion

Providing reasons for a continuation of a secular bear market is easy but also somewhat foolish. We all know about the problems with Europe, Goldman (GS), debt, and the possibility of a double dip. This is coincidental noise. There's always news to provide an excuse for what the market did or didn’t do. It's easy to dig up reasons for why something happens. Will the Goldman drama insure Dodd’s regulatory reform? Will the oil in the Gulf provide the fuel to pass Cap and Trade? Will the slowdown and austerity in Europe result in a double dip here? We create reasons, but the truth is it's the psychology and music of the market, the mood of the spritus mondi that determines the fundamentals and not the other way round.

So I turn to the charts to determine the trend. Speculation is the art of observation, pure, and experiential. Thinking isn’t necessary and often just gets in the way.

To receive Jeff's daily commentary, day trading & swing trading setups, intra-day trading alerts and trading lessons, subscribe to his Daily Market Report