Is the SPX In the Middle of a Real Breakout? Or Is Something Else Happening?

“When time and price balance out, look for a change in trend.”
-W.D. Gann

An intriguing aspect of this market is an ongoing synergy between the SPX and gold.

While gold left what looks like a weekly Selling Climax, the SPX has not registered a weekly Buying Climax, but given Monday's spike to record highs to kick off the week a reversal lower into Friday could record a weekly Buying Climax in the index.

The SPX/gold correlation need not play out precisely at the same time—the market is not a fine Swiss watch…plus or minus a week works.

Likewise the correlation does not suggest that every multi-month or multi-week top or bottom occur simultaneously.

It means that general trends and cycles have coincided.

Behind all bull and bear moves are currency considerations.

The strength in the stock market off the April low coincided with a low in the dollar—arguably perpetuated by a flight into the dollar over trade war fears.

Dollar denominated U.S. assets such as stocks benefitted.

The dollar triggered a little Rule of 4 Breakout (a breakout over triple tops) on August 8 near our initial cycle turn date for stocks on August 8.

However, the dollar has knifed below the breakout point and iis n jeopardy of confirming a false breakout.

Notably, the dollar's signal reversal bar (a Lizard sell signal Topping Tail) on August 15 coincided with the low day in gold.

Theoretically, a continued retreat in the dollar could pressure U.S. stocks as foreign fund flows reverse.

The aforesaid August 8th/2863 SPX square-out elicited a 90 degree price decline to 2800.

From there the index marched higher hitting a possible harmonic with the DJIA 1929 high at 2976 on Friday as shown in yesterday's report.

Bull market's like to set new highs on Friday's in the summer and Friday's nominal new all-time high saw follow through to kick off the week.

Maybe something, maybe nothing but the SPX push to 2898  squares out with the 667  low in 2009.

Interestingly 667 and 2898 also align with 62, which was the SPX bear market bottom in 1974.

Happenstance?

(click here to enlarge)

Notice how 667 is square early March, the date of the bear market low in 2009.

Notice how 62 is opposite early December the date of the bear market low in 1974.

Notice how all these numbers and dates resonate with early September.

This is what is meant by time and price squaring out or balancing out.

Early September has been a historic turning point for 100 years.

It marked the final high in 1929.

It marked the change in trend in 1987 and 2000.

It marked the beginning of the crash phase in 2008.

As noted in Monday's report, clearing 2876 indicated an extension higher. It will be interesting to see if the SPX can clear this latest square-out at 2898.

Is it possible the August 8 square-out was a primary high with Monday being a secondary square-out high?

While the glamour go-go names are partying like its 1999, internals continue to weaken painting a meaningful divergence.

25% of the  SPX index names hit a new high in league with the new high in the index at its January 26 high.

On Friday must 8% of the SPX names registered new highs.

Divergences in momentum do not always mark a top, but almost all market tops are marked by such divergences.

Divergences are not timing indicators.

Likewise, not all square-outs are created equal: while all square-outs are not major highs (or lows) all major highs (and lows) are square-outs.

A weekly SPX below shows a trendline connecting the February 2016 low with the October  2016 pre-election low and the August 21, 2017 low.

Proving the geometry of this trendline is how a parallel trendline ties to the January 2018 peak.

Notice how the February drop was a break in trend.

The SPX regained the channel in March but once again declined below the channel in April.

Since then the SPX has crawled back up the lower rail of the channel finally notching out a new record high over the last two sessions precisely 7 months from the January 26th high.

As you can see, theoretically there is room to run before the lower rail of this 2 ½ year channel is hit again.

As offered last week, the key level for the bull is 2800.

2800 currently defines a 3 point trendline from the April low.

A break below 2800 implies a drop  to around 2620

Interestingly this equates to near the proverbial 10% correction.

Additionall,y a Measured Move of the 341 point Jan/Feb decline from current levels represents an undercut of the lower trend channel…mirroring the undercut in February.

Be that as it may, the SPX is in the heart of a  breakout from Thursday's Plus One/Minus Two buy set up.

In tandem with the red weekly trendline at 2800, there are double bottoms at 2800 from August 2 and August 15th—underscoring the critical nature of this level.

That said, 2800 is 100 SPX points lower so it isn't going to offer much short-term guidance.

What will offer guidance is the above 2863 level. A break of the 2863 square-out implies lower prices.

In keeping with the SPX/gold synergy, a weekly god from December 2015 shows the critical level in gold comes in around 1260.

This should tie to the 118 GLD level mentioned in the last report.

It will be important to gauge the behavior of gold if it traces out two consecutive weekly higher highs.

This could occur next week on trade above whatever this weeks high is.

If that occurs, it will be critical to observe the behavior of gold if and when it carves out 3 consecutive higher weekly highs.

This would turn the 3 Week Chart up.

If gold acts bullish following a turn up of the 3 Week Chart, it suggests a bull market in the metal has started.

Conclusion.

If the SPX can clear the trend channel in the above weekly chart, then stocks could go hyperbolic with a spike over 3000.

However, if the upper rail of the trend channel acts as resistance once again and the index turns down, there is no room for a break of 2800.