This column was originally published on RealMoney on Oct. 11 at 7:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
The hunt for "red" October is on. The bears remain in hot pursuit.
Over a month ago, I stated that the cycles were pointing down into October and that it looked like a poor bet for the fourth quarter to bail out the five-year decennial bulls. These are the bulls that have been clinging to the prospect that this "5" year, 2005, like most every other year ending in the numeral 5 in the past, would be a rally year with a close to the upside.
However, the outside-down January told us that despite what might occur in the second and third quarters, there was a better-than-average likelihood that the popular averages would give a down year. And we said so at that time in January.
As the fourth quarter commenced, the bulls have been coughing up their positions as the window for an up year gets narrower and narrower.
Moreover, September, which is typically the worst-performing month, perversely may have set the bulls up, serving up a dose of complacency as the month remained up with two rally attempts that tested the high of the year scored on Sept. 3 -- 1245.80 on the
That 1245.80 level now becomes an important point from which to measure the market. Here are the key levels to watch (which I will diagram in a Square of Nine Chart tomorrow) from that 1245.80 high:
Ninety degrees down on the Gann Square of Nine Chart is 1210 S&P.
One-hundred and eighty degrees down is 1177, which is interesting as that is the high of the first rally in May off the April low this year.
Two-hundred and seventy degrees down is 1142, which is interesting because 1142.60 is the low on April 15.
There was only one lower close this spring: 1137.50 on April 20. Two-hundred and seventy degrees down from the high is the low for the year -- so far. Three-hundred and sixty degrees down from this year's high is 1108. That is also interesting because the high of the low-bar month of 2004 is 1109.07. That occurred in August 2004.
So you can see how going backward in time
proves the geometry
and the importance of the 1245 high. This is especially important to note given that on the one-year cycle from the 2004 low, the S&P found a high. That August high this year has been confirmed by the turndown in the Quarterly Chart last week. As I said in the spring after the outside-down January, the likelihood was for a late July/August top in keeping with an analog from the 1990 cycle, 180 months ago.
In my opinion, based on the current price action and the Get Out of Dodge Sell Setup issued last week, a minimum expectation is in place for a 360-degree move down by the S&P to 1109.
That set up some interesting symmetry as the turndown of the Quarterly Chart occurred after a break of the July low at 1183.55. The point count from the S&P August high of 1245.80 to 1183.55 is 62.25 points.
A symmetrical 62.25-point decline from last Thursday's low of 1182.25 is 1120 S&P, which is less than 1% from a 360-degree move down which, as we stated, was 1109.
Adding to the problems for the bulls are:
A Real Distribution Week was scored in the Nasdaq last week.
I believe one also was scored on the S&P, but I will have to wait to find the data on that until Tuesday morning.
Not only did July's outside-up month not lead to upside momentum, but that outside-up month has now been offset, leaving a bearish Reversal of a Reversal Pattern. Remember that fast moves come from false moves.
The advance into the July/August high now looks like a false breakout and a bull trap.
As I stated during last weekend's Las Vegas seminar (which will be available from Trader's Library on DVD along with a 300-plus-page manual), corrections come from excess bullishness while complacency causes crashes.
Over recent months, complacency has come to dominate sentiment as the market was pelted with all sorts of bad news but hung in there. Neither higher interest rates, terrorism, hurricanes that caused disintermediation in the energy markets and will exacerbate our deficit spending, nor runaway oil and heating oil prices could derail the bulls. Like a ball under water, the market kept popping back up. That complacency with which the market shrugged off all the bad news sets up this October surprise.
: The only good thing about Monday's market was that bonds were flat. Of course, the bond market was closed for Columbus Day. So it ain't saying much if you catch my drift. The S&P has closed down every day so far in October -- except for Friday when it rose a puny 4 points. The daily chart has not yet been able to turn up in the current October decline. That lack of a truly meaningful bounce in time and price after the quarterly chart turned down on Thursday speaks to the downward pressure the cycles are exerting.
Of course, it's always possible that a rally to as high as 1210 could occur without changing the bearish picture. But I believe this to be an opportunity to sell and to sell short. Until proven otherwise, any snapback or rally is an opportunity to short until we see a change in character and behavior in the price action. If last Thursday's low is violated and holds, accelerated downside momentum should resume.
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