A Tipping Point: March 23, 2012

Bears are understandably shell-shocked after the past three months.   Top picking has been a frustrating and humbling experience, as markets — like an addict in search of his next fix — have ignored everything but the promise of additional QE.  But, the improbable low-volume, non-stop melt up might finally be at a tipping point.

As noted in yesterday’s post, several key indices have finally reacted off their harmonic pattern targets.

RUT completed a Crab Pattern within the last leg of a Bat Pattern and has yet to clear a key trend line off the May and July highs.  COMP completed a tiny Crab within a little Butterfly pattern and tagged a key trend line off the 2007 highs.  DJIA completed a Crab pattern just a few points away from completing a Butterfly pattern and large Bat pattern.

Each of the indices is showing bearish divergence on the daily time frame within an overextended rising wedge that’s in danger of being broken — but haven’t broken yet.  In spite of the completed patterns, there are some potential bullish patterns, such as the Dow’s Bat and SPX’s Butterfly, that should take prices just a little higher.

I’ve spent the past several days wandering the charting desert in search of some sign of things to come.  I posted a bit the other day about the SPX wedge within a wedge and how we’re at Fibonacci levels of time and price in each.   I started by charting some basic channels and fib levels, along with the rising wedges.

As we discussed the other day [see: Big Picture, Part 2], the smaller yellow wedge apex is not only right at the .886 of the 2007-2009 price decline, but also the .886 fib levels of the larger rising wedge apex.  On top of all that, it’s also at the .618 of the large rising wedge in terms of time.  This is significant, because rising wedges commonly give up the ghost around 61.8% of the way to their apex.

And, within the smaller rising wedge, we can also see we’re at important fib levels — .786 in terms of price and .886 in terms of time.

All this is well and good, and we clearly got the reaction we were looking for when we were looking for it.   The key level coming up is the small rising wedge bottom at 1374.   If we take that out, we could find our way down to 1300 in a jiffy.  And, the bottom of the large red rising wedge is currently all the way down at 1165.

But, I know I don’t have to remind anyone here that rising wedges can hang on for a long time — especially lately.   And, as mentioned earlier, there are still some potential bullish Butterfly Patterns that could fulfill to the upside — notably SPX 1419 and 1433.  And, sometimes harmonic reactions are pathetically small bumps on the road to bigger and better things.

Bottom line, I believe we’re not quite to our turning point.  But, we will be in the next couple of weeks.  Stay long, but stay frosty.


Thus, the days spent wandering the desert.  And, let me be clear, this is pure spit-balling folks.  I’ve been looking at long-term patterns in the markets, trying to discern similarities that might offer a clue as to the big picture.  One era that fascinates me is the 1970s.

We had a decade-long war in Vietnam and an oil shock when OPEC imposed an embargo in response to our military support of Israel in the Yom Kippur War.  Oil prices went from $3/bbl in 1970 to nearly $40 in 1980.  The following chart, from the EIA and posted on Wikipedia, shows the blow by blow.  (For history buffs, there’s an interesting chronology available here.)

Inflation went from 3.6% in 1973 to 11.8% in 1975 and 13.9% in 1980.   P/E ratios went from 17.7 in 1970 to 6.7 in 1975.  The 1-yr went from 4.62% in 1972 to 11.03% in 1974.  And, stocks were all over the map.  After gains of 25% from 1970-72, the S&P; 500 had losses of 23% in 1973, 29% in 1974 and 14% in 1977; and, gains of 29% in 1975.

In short, it was an important inflection point. To Elliott Wave guys, it was an important turn in wave counts.  To all the rest of us, it was the payoff to The Great Crab.

What?  You don’t remember The Great Crab?  Okay, so it’s possible I just made that name up.  But, it’s kinda catchy.  And, more importantly, it fits.

First, well… it’s a Crab pattern.   It features a point B at about 50% of the XA price difference (for those who skipped the lesson, go back and read: Crab and Butterfly Patterns Explained.)   Second, it began in the Great Depression, so that gives the name a ring of authenticity.

And, finally, what else would you name a pattern that in 1937, after a 90% drop, 300% rally and subsequent 60% drop, pretty accurately predicted the following reversals at key Fibonacci points?

Fib.          Year       Decline

1.618         1956        19%
2.618         1961        28%
3.618         1969        36%

All that coolness aside, I believe the 1970s offer important clues to what lies ahead.  I’m doing some research that I’ll publish in the next day or two that, quite frankly, is knocking my socks off.

Stay tuned.


A Tipping Point: March 23, 2012 — 10 Comments

  1. Great questions and comments here, everyone.  I'm going to sign off and continue working on the website.  I promised myself I'd get it up and running this weekend, and really want to make it happen — even if it means delaying that article I'm working on.   Cheers~

  2. Sadly, the book remains unopened on desk, as I'm working overtime to get the new website up and running.  I haven't charted bonds lately, but will take a fresh look now that things are heating up a bit.  Re Daneric's theory, I think it has merit.  

    I think deflation and inflation, lower rates and higher rates are all on the table.  But, you have to look at why things are happening; e.g. an oil shock would obviously spike inflation, which would damage markets and worsen the economy = stagflation/recession a la 1973. 

    High interest rates lagged inflation, as you can see from the attached table from Shiller's data, but lasted on into the mid-1980s.  This made it particularly difficult to recover, because the things you normally do to stimulate the economy would make already bad inflation worse.

    If a credit-driven spike in interest rates were to lead the way, we'd no doubt see a hit to the (leveraged) economy and good, old-fashioned recession/deflation.

  3.  Again, thanks for the great articles, charts, and insight……How is the "Forth Turning" coming?………spooky to see riots and revolutions around the globe now after reading that book several years ago……I remember you touching on rates/bonds months ago and of course through the recent cartoon, but I have not noticed anything since…….Do you have an opinion on bonds and rates in the s&l; term?….. How do you fall in relation to Daneric and his rising yield deflation?…… I follow them, tbt/tlt specifically, and long bonds have not done anything since their 34 year Gann birth date in Chicago back in August.

    Have a great weekend

  4. Hi PW,

    I've been doing a little doodling myself today. I've come across a bunch (tons) of charts which all exhibit the same behavior. Take a four year daily chart, log scale. Draw fib fan lines from March 09 low to May 10 (ish) high. That will create the top of the wedge. For the bottom, draw a trend line up from August 11 low. Perhaps this is just highlighting what you mention above but I thought it interesting how the fib lines drew half the wedge.

    Kind of weird. I've always thought there was more to that flash crash in May 2010 then a fat finger etc. Also kind of weird considering recent market shennanigan's…

  5. There is definitely a potential path higher for both, esp 1420 or 1433 on SPX.  But, odd that SPX closed (barely) below the SMA 10 and saw a bearish cross on MACD.  Still plenty of negative divergence, harmonic pattern overhead and that pesky rising wedge. 

  6. Thanks for the props, Tommy.  Excellent point about Bernanke as The Hero on the cover of The Atlantic.  If I didn't know any better, I'd say that's a social mood indicator of some sort.

  7. Hey Pebble

    yeah, we are certainly looking toppy, I still find it bizarre we got above 1400, urghh.

    Problem I have near term is that the monthly cycle is still very bullish. The weekly IS WEAK, but that can easily flip back up next week.

    If I had to guess right now, I still think we get a kick higher to sp'1440 /IWM 86 level. That'd make a nicer high during early April, then trundle side ways for a few weeks, before a targetted move to …none other than 1150 zone.

    Have a nice weekend.