Where Is Last-Ditch Support for This Old Bull Market?

"When the weather changes, nobody believes the laws of physics have changed. Similarly, I don't believe that when the stock market goes into terrible gyrations its rules have changed." --Benoit Mandelbrot

The SPX experienced a 12% decline in just 14 days off its January 26 high.

History shows that this is unusually small for a possible first leg down in a bear market.

However, it is not without precedent: the leg down from the primary high in July 2007 was apx 12%, followed by a runup to a nominal new all time high 90 days later in October.

This year the NDX shows a similar pattern with a high in late January with a roughly 12% decline and a nominal new high in mid-March.

It is still possible that the market is in a bull market correction and that the sharp decline in February was a shake-out:

Following the lowest volatility, most gradual advance in history after the 2016 election, an expansion of volatility was to be expected. A calm and orderly advance has been followed by an erratic and volatile 3 months since late January.

So the question is did the current outbreak in volatility satisfy a reversion to the mean and the long-awaited 10% plus correction?

After all, there is a POSSIBLE W Bottom on the SPX and other popular indices.

Alternatively, has the SPX carved out a bearish inverted Cup & Handle in 2018 implying another shoe to drop?

Since price is the final arbiter, what price on the SPX would confirm a bear market -- or at least a significant leg lower?

We are in the 8th year of the Gann Decennial Pattern.

On the 30, 60 and 90 year Gann cycles there were lows established in the first quarter of those corresponding cycles -- 1988, 1958 and 1928.

Based on this analysis alone, it would be a bearish indication if the first quarter low on February 9 at 2532.69 were broken.

If the SPX snaps its February low a weekly lower low and a lower high would be on the table---a bearish structure.

It would be simple to say that a lower WEEKLY low and a lower WEEKLY high confirms a bear market but that is not always that easy. There is always a T-Rex in the ointment.

For example there were lower weekly highs and lower weekly lows in play at the major Jan/Feb 2016 low.

This is why the cyclical analysis above based on the 30,60, 90 year cycles is going to be key.

This is the current DNA of the market.

While the typical prattle we hear in the financial media is that bull markets don't die of old age, W.D. Gann was a master of cycles and stated that time IS more important than price.

Let's take a look:

At 8 years, 10 months and 20 days, theadvance from March 9th  2009 to January 26, 2018 (so far) ranks as the second longest in history with a percentage gain of 331%.

The longest advance was from October, 1990 to March 24, 2000 at 9 years, 5 months and 13 days with a percentage advance of 427%.

The next longest advance was from August 24, 1921 to September 3, 1929 at 8 years 10 days for a percentage gain of 504%.

We don't know if this is a correction or a first leg down yet, but as time is more important than price this week is worth watching because history shows that 79% of all corrections are complete within 3 months.

If we decline to new lows in May, we will be in the 4th month.

So new lows in May will be troublesome for the bull case just as trade below the February 9 low is problematic.

What are the levels to watch for should the Feb low be broken?

1) The mid-point of the last leg up from the 2016 low (1810) to the January 2018 high (2872) is 2341.

2) The mid-point of the November 2016 election low to the Jan 2018 high is 2478.

3) The mid-point from the August 2017 low is 2644. This is a level we've been watching carefully.

Last week the SPX slipped below this key 2644 level after being rejected from an attempt to convert the 2702 mid-point of the year.  It turned its 3 Day Chart back down in the process and tested its 200 dma for the 3rd time this year. The index recaptured 2644 late in the week but is challenging key resistance at 2678. This the mid-point of the secondary high and the secondary low --- n other words the mid-point of the March high and the April low.

Below is a monthly SPX from January 2008, when the plug was pulled:



1) I have created a trend channel starting with the tops in 2010, 2011, and 2015 and paralleled a trendline from the November 2008 crash low with the presumption that November 2008 was a primary low with the March 2009 low being an undercut low. There is some good symmetry suggesting this is viable based on the January 2018 throw-over of a trend channel.

Note how the bottom of the trend channel catches the 2011 low and the 2016 low.

Currently, the bottom rail of this channel comes in around the 2341 mid-point of the advance from 2016.

2) A blue channel line using the rally highs since the 2016 low (with the January spike reflecting the throw-over, buying climax) is just below this years lows. Another reason why a decline below the Feb low is bearish.

3) A red trend channel connects the lows since 2016 and the highs since 2016 INCLUDING the January spike high.

Conclusion.

My takeaway is as follows:

A decline below the 200 day moving average and the key 2600 level again will trigger a Rule of 4 Sell signal -- a break of a 3 point trendline. Fast moves often follow Rule of 4 Sell signals. The presumption is that a decline below 2600 again will lead to a break of the February low and satisfy an extension to 2478. This is the mid-point of the November 2016 election low to the Jan 2018 high.

2460-2480 has been on our radar for over a month. If this level does not hold it implies a decline to 2341ish, the mid point of the entire last leg up.

A decline to 2341 satisfies a roughly 20% decline mirroring the largest decline since 2009 -- the correction in 2011.

So while a break below the Feb low may be a nail in the coffin -- installing weekly lower highs and weekly lower lows, it is not necessarily the death warrant some believe it to be.

As offered above, there were weekly lower lows and lower highs going into the 2016 low.

What will be critical to observe on any break of the Feb low will be the behavior of any subsequent rally phase.

Theoretically, a decline below to 2478 or 2341 that subsequently sees the SPX reclaim its 200 day moving average and 2580 to 2600 allows for the potential for push to the old highs near 2872 or in the extreme even a blow-out to over 3000.

IF the February lows are decisively violated, it will be the complexion of any subsequent rally that will tell the tale of the tape.

My cycle work is honing in on when such a rally phase should begin. As we glean the makings of a trough we will let you know.

That said, caution is warranted:

1)The SPX had a false breakout spike in January in keeping with our long-standing call in this space for a false spike a la January 1973.

2) The structure of the advance looks like it has satisfied 5 waves up from March '09 in league with our article last year, Slaughterhouse Five.

3) The current rising wedge since the 2016 low ran for 1062 points which precisely mirrors the rising wedge advance from the 2011 low to the 2015 high.



The presumption is that like the pattern of the rising wedge following the May 2015 top there is another shoe to drop -- bear market OR bull market.

Strategy.

Above we mentioned the possibility of a bearish inverted Cup & Handle on the SPX from the February low.

There may be a smaller fractal of that Cup & Handle traced out from the April 2nd low with last weeks 3 day rally being a possible handle.

If so, this underpins the idea that surprises should happen to the downside in what shapes up to be a very pivotal week.