The Market Ready To Tip Its Hand This Week

“All is riddle, and the key to a riddle is another riddle.” – Ralph Waldo Emerson

“In labyrinths of coral caves

The echo of a distant time

Comes willowing across the sand

And everything is green and submarine.” – Echoes, Pink Floyd

Markets usually (not always) give warning signs ahead of a major high or low. In the case of a potential top, the vast majority of traders translate the failure of a market or a stock to succumb to warnings as a sign of strength.

The trick of the trade is the difference between sniffing out potential warning signs and actually acting on them.

This requires technical and timing tools.

Because, if there's one thing any trader who’s been through more than a few cycles knows, the market will take thesis and conjecture well beyond the rational and logical and into the twilight zone.

Mr. Market will tempt you to adopt irrational extrapolations.

This is how you get price to sales ratios on IPOs like SNOW north of 80.

Fear Of Missing Out (FOMO) can create a snowball from a snowflake — momentum from a moment.

The risk is, as we know, one snowflake can cause an avalanche — just as a butterfly in China can cause a hurricane on the other side of the globe.

The key is time. It may take a long time, but the connection is real. If a butterfly flaps its wings at just the right point in space and time, the effect can be a hurricane.

A very small change in initial conditions, a catalyst, can create significant unexpected outcomes.

One of the things I have learned in my 35 year trading career is to expect the unexpected. The unexpected has a nasty habit of showing up when the trend seems impervious.

This is because, as W.D. Gann wrote, trend doesn’t turn until TIME is up.

A trend can and will persist beyond the break point.

In other words, even after a top has been struck, markets/stocks often back and fill and test prior to cycles exerting their influence in earnest — when TIME is up.

That said, not all cycles are created equal. Locating what W.D. Gann referred to as the time factor is not a simple thing. This is because cycles best exert their influence when a cluster occurs.

And when there is congruity between time and price.

Allow me to explain by giving you an example of the interchangeability of time and price.

The SPX struck a bear market low of 768.63 in October 2002.

Moving the decimal point, we get 76.8.

Rounding 76.8 gives 77.

77 months after the October 2002 bear market low was the March 2009 bear market low.

Interestingly, using 76 months gives the closing monthly low in February 2009.

There are a multitude of such examples that unfold through market history.

The SPX gave a “warning” of its October 2002 low with a low in July 2002.

The October 2002 low can be considered a primary low with a secondary low being struck 5 months later in March 2003.

Likewise, the SPX gave a warning in July 2007 with a primary top followed by a secondary top in October 2007.

As well, the primary or orthodox low of the 08-09 bear market occurred in November 2008.

The secondary low occurred in March 2009.

So the market usually (not always) gives warnings, harbingers of a change in trend.

The question is whether the break from the September top was such a warning.

If so, there are two scenarios:

1) The SPX could make an Overthrow High above the September high and then quickly reverse.

2) The SPX could falter from a lower high.

For example, the SPX carved out an Overthrow High in October 2007.

It made an Undercut Low in October 2002.

It also traced out an Undercut low in March 2009.

However, on September 1, 2000, the SPX struck a LOWER secondary high to its March primary high in March that year.

Above we mentioned that not all cycles are created equal.

Cycles can invert with highs becoming lows and lows becoming highs and then go back into sync again.

As to the year 2000 and the important 20 year cycle, it is worth noting that the SPX struck an all-time bull market spike high on March 24.

20 years later we got an historic spike low on March 23.

This same 20 year cycle saw a secondary high on September 1, 2000.

This year the SPX reversed with authority on September 2.

This brings us to the current position of the SPX.

The structure on the SPX suggests that the impulsive move into September 2 was a Wave 3.

The strong rebound off September 24 occurred with our time and price projections.

Why? There was good natural symmetry with the September 24 being 180 degrees straight across and opposite the March 23 crash low.

As well, the 3227 is 1 ½ cycles (an important 540 degrees) down from the 3588 September 2 all time high.

This time/price cluster called for a low, and we got one in league with a turn down in the SPX 3 Week Chart, the first one since the March low, and in league with a test of the rising 20 week moving average, the first one since the March low, for a weekly Holy Grail buy signal.

Yes, the market gives warnings, signals.

Let’s drill down to the daily SPX to see what it looks like.

On the following daily SPX I connected the June 8 high, which I am counting as a wave 1 high off the March low, and the September 2 high, which I am counting as a wave 3 high off the March low.

I then paralleled a line off the late June low.

The break into September 24 broke this trendline. It was recovered on October 8 as the Trump Tweet high (regarding an end to stimulus talks until the election was over) was reclaimed.

I also created a trend channel by connecting the mid-June low with the September 24 low and then paralleling a line from the June 8 high.

As you can see, the top of this channel rejected the SPX on Monday.

Notice that last week's low was defined by the lower rail of the first trend channel.

The takeaway is if the September 2 high was a wave 3 top, then a new high for a wave 5 is on the table — UNLESS a truncated or lower wave 5 has played out.

Drilling down further to the September 24 low, it is possible to count 3 waves up into the October 12 high (last Monday). If the SPX cannot exceed that 3549.95 high in coming days, then October 12 may have been a truncated 5th wave high off the September 24 low.

In sum, if you’ve been keeping count, that means we may have a truncated 5th wave (Oct 12) within the context of a smaller truncated 5th wave high (October 16).

The price action early this week will be telling.

It is underpinned by the position of the SPX 3 Week Chart… which is how we determine the Line of Least Resistance.

As noted above, the SPX turned its 3 Week Chart down for the first time since the March low on the week of September 14. The actual turn down occurred at a price of 3310.46.

The SPX 3 Week Chart turned back up last week and the index tailed off.

When the trend is strongly up, a turn down in the 3 Week Chart should define a low soon, in terms of time and price… even if a primary cycle high is being installed — the first turndown of the 3 Week Chart in a long time should see a knee-jerk reaction.

So the jury is out as to what is playing out.

If early September was indeed an important high, then last week's turn back up in the 3 Week Chart may have defined a high.

There is another scenario that we must be mindful of.

In this scenario, the September 24 low was the A wave of a 4th wave decline with a C wave to follow a potential B wave high (whether that B wave high is in or we get a nominal new high first).

That C wave decline entails a push below SPX 3200.

Conclusion. As implied by the above daily SPX, last week's low is an important pivot. As long as the market holds above it, the door is open to higher, probably into election when Time & Price line up on a monthly basis from the 2000 top.

Breakage below last week's low with follow through a 20/50 Bowtie, an open gap from 9/28 opens the door to lower prices.

As well, breakage below a possible inverse right shoulder (around 3330) should see accelerated momentum.

This is because fast moves often come from failed patterns.

In addition to an inverse Head & Shoulders, the SPX may be working on a Cup & Handle, the left side of the Cup being the September top.

If the “Handle” (last week's low) snaps, that is a possible early warning of a failure of the inverse H&S.