A week ago, I stumbled across an anomaly that puzzled me.  Looking at the SPX weekly, it appeared that we had a significant correction every 90 days or so.

I posted a quick chart on May 2 that, when eyeballed, looked pretty convincing.  Now that I’ve had the opportunity to go back and study it a bit, I’m convinced there’s a bona fide phenomenon here.

I haven’t a clue why it is happening, but it’s happening all the same.  First, the picture that speaks a thousand bucks:

Digging into the SPX daily data, it’s remarkably consistent.  I found 15 instances, going back to July 2007, where we had a downturn within 15 calendar days on an 87 day (average) cycle.  The longest cycle was 105 days, reached 8/9/10 and 2/18/11.  The shortest — and only one that didn’t meet the +/- 15 day criteria — was 63 days reached on 2/27/08. 

Most of the big declines were captured by the cycles.  One notable exception was the June ’09 decline, which was bigger than the May ’09 decline captured in the predicted time frame.

I measured the declines beginning with the intraday high within 15 calendar days of the cycle predicted date.  I then measured the lowest point within 3 trading days, within 30 trading days, and within the remainder of the cycle.

Now, for results:

The range of 3-day declines was 1.85 — 9.99%, with a mean of 4.16% and median of 3.63%.

The range of 30-day declines was 3.88 — 26.45%, with a mean of 11.40% and median of 10.18%.

The range of intra-cycle declines was 3.88 — 36.15%, with a mean of 13.31% and a median of 10.79%.

For anyone wondering, we are currently at 81 calendar days since the 2/18 top.  If the pattern were to hold, the 87th day is Monday the 16th (although Friday the 13th has a nice ring to it.)

If we were to rally up to the .786 fib off the Mar ’09 lows (1381.50), the model would suggest a decline within 3 days to 1324, within 30 days to 1224 and intra-cycle to 1198.  The fact that each of these price levels is significant (50-day EMA, .618 fib, round number) gives me additional confidence.

Today would also be a logical entry point, as we’re at the .618 retrace off the 1370 highs.  The corresponding targets would be 1297, 1200 and 1193 — also logical from a charting standpoint. The one thing the model does not say is WHERE the top is (it’s always something!)

Last, as someone who’s admittedly bearish at this juncture in the economy/market, I should point out that the biggest cycle declines I found were only the first stage of multi-cycle declines — especially the Oct ’07 — Mar ’09 crash.  So, it’s entirely possible that a decline to 1200 within 87 days of the next cycle start is only the first stage in a larger move down  — the first leg down of P[3].

On the other hand, this could be one of those 4% blips that’s already come and gone.  The 1370 high was on May 2 — 73 days into the cycle since 2/18.  We were down 3.02% when we hit 1329 on Mar 5.

But, my bias and my gut tell me otherwise.  IF anything, we get one more bump up before the bigger move down.  We’re technically overbought, sentiment is very high, the end of QE2 is in sight and we face three strong points of overhead resistance:

(1) the .786 fib line at 1381.50
(2) we’re VERY far along in a rising wedge started in Mar ’09.
(3) we’re right up against the supercycle line from the early 90’s, currently about 1390-1400.

Happy trading!

From the good folks at Marketwatch, a quick fix to an inadvertent negative headline.

  HEADLINES AT 11:15 AM:

HEADLINES AT 11:43 AM:

See the difference?

Second line from the bottom…  If you look closely, you’ll see the link to “Payrolls a Matter of Trust” article replaced the “Workplace Suicides Hit Record High” article.

I’m all for trust in payrolls, but I think record high workplace suicides is an equally important story.

For anyone looking for good analysis on today’s numbers, check out: http://www.zerohedge.com/article/nfp-ex-mcdonalds-and-birth-death-7k

I suspect this morning’s bounce is all about (1) jumping on stocks’ coattails, and (2) this support line:

What hasn’t changed is: (1) there’s another margin hike coming Monday, (2) plenty of folks are still figuring out how to meet yesterday’s margin calls, and (3) JPM probably hasn’t zeroed out their short position yet, and still has friends in high places.

So, 3-2, the bears win.  I’d use this bounce to add a few SLV puts.  The next support isn’t till 31 or so.

As I suspected, incredibly impressive employment numbers reported this morning!

We can all go back to buying stocks, knowing that the economy is back on track….except for the 22% of Americans who are unemployed or underemployed (the way the BLS reported statistics up until 1994 when we decided that those unemployed longer than a year didn’t matter.)

Remember the half dozen press conferences by fed govs a few days ago, practically guaranteeing great numbers for the rest of the year?  After yesterday’s initial claims selloff, we should expect these numbers to be even more carefully managed going forward.  In other words, let’s not read a lot into them other than the impact they’re likely to have on the blissfully ignorant.

On a positive note, going long at yesterday’s lows is looking like a good move.  Again, we have three targets to complete P[2]:

(1) 1381.50 — the .786 fib mark off the Mar ’09 lows
(2) 1385 — the top of the rising wedge, also from Mar ’09
(3) 1395 — the trendline from 1991 that we’ve been backtesting since Mar ’09.

From the May 2 post:

Approaching these targets, I’ll look to ease up on current long positions and revert to deathwatch
(P3) mode.

Interesting that the trendline responsible for this morning’s bounce continued to play an important role all day long.  We mentioned this morning that it currently stands at around 1335. 

While SPX was all over the map today, it respected this support and closed at 1335.10. 

Also, we’ve had 4 red candles in a row on the daily.  There haven’t been 5 in a row since July ’10.   While I’m certainly bearish in the medium and longer terms, I continue to feel we have one last push up before we’re done with P[2].

Whether we get there from this trend line, or from the lower end of the rising wedge isn’t terribly important unless you’re a day trader.   Key support remaining, in order: this trendline, the 1294 April low, and the 1280ish rising wedge.   I would selectively add to short positions if/when each of those supports is taken out.  In the meantime, I am modestly long as a short-term trade.

Several fed gov’s were in the news yesterday, practically guaranteeing a +200K employment number for months to come — stated with the kind of confidence that makes one wonder if the fix is in.

Look for a positive surprise when tomorrow’s payroll/unemployment numbers are released.  It will go a long way in reaffirming why today’s data was anomalous (how many bus drivers could be on furlough at once?) and doesn’t really count.

The key question:  are market participants gullible enough to buy it again?

The market bounced off truly abysmal employment figures today.  I suspect there’s one more push up to 1375-1390 before P[3] commences in earnest, probably around the middle of the month if the every 90 day pattern repeats (see 5/2 post.)

Showing up again to provide the bounce?  The trendline deriving from the Oct ’07 highs — which also grazes the Feb 18 top, the 4/6 top and the 4/20 – 4/25 shelf.  Today, it sits at about 1335.

The XLF has so far failed to retake a long-term trendline from August 2010.  It broke through support on 4/14 and has failed to rise above it four times in a row.  And, the latest push up has been on declining volume.

More importantly, a downward sloping trendline dating back to 2/18 lies just ahead.  If XLF can’t break through, look for a resumption of the downturn, targeting the mid-15s in the coming week.

The Deutsche Bank suit could have a huge impact on the financials — a new front in the mortgage wars. Deutsche surely isn’t the only bank guilty of “reckless lending” and hoisting bad loans on the government. I’m looking to play the downside on BAC, C and WFC, especially after this morning’s run up.

http://www.marketwatch.com/story/deutsche-bank-hit-with-us-mortgage-fraud-suit-2011-05-03

Yesterday’s OBL rally was impressively thwarted, leaving us with a bearish candle and a possible top — albeit several points short of the overhead resistance mentioned in the last post.  As expected, we broke down from the smaller of our two rising wedges.  The larger wedge remains.

One more push higher would make for a cleaner EW pattern (5 distinguishable waves of 5) and would provide a little extra technical overbought conditions to be put in place before the leg down.  Such a push could begin here, or from trendline support found at 1335 (see note below), 1320 (off the trendline formed from the 3/16 and 4/18 lows) or the bottom of the larger rising wedge from Mar ’09 (currently at 1295, which is support from the 4/18 low.)

Any push should be contained in the 1382 – 1293 range as discussed in the last post and would set up the long-awaited next wave down.  I’ll be keeping an eye on the daily MACD and RSI, both currently rolling over and forming lower highs, but not yet firmly in the bearish camp.

NOTE:  another important trendline was left out of yesterday’s post.  The line drawn from the Oct 2007 1576 high to the 2/18 1344 high and the 4/6 1339 high could come back into play in the next few days.  It was very strong resistance on 2/18 and 4/6 and could now provide strong support — possibly the bounce before leg 5.  It currently stands at 1335.  I suspect if we descend through it without difficulty, we should have a swift decline to 1295 or below.