In my Special Alert, I wrote: “The market is now exhibiting something it hasn't exhibited for quite some time – a willingness to SELL. The market has gone the longest time in history without a 10% correction. My latest Special Alert on July 17, I wrote, "My view is that the market is set to turn right away. With the date this Thursday,” As you will recall, Thursday was July 19 – the turn date I specifically mentioned in my Special Alert. It was the day of the high and the only day the Dow Jones Industrials have ever closed above 14,000.
The following chart accompanied the update:
The chart was accompanied by the following message: “The chart shows we have reached the bottom of the channel. If this line does not hold, the odds are strong that some serious selling will come in. The market is oversold, but it is also emotional. Watch that line carefully. I have put in the Fibonacci retracement lines as they are the next areas of logical support if the market breaks.”
The market broke below the channel, serious selling came in and drove the market down to the first (upper) Fibonacci line – as projected would happen if the channel was broken (the Nasdaq Composite also went right to its 200-day moving average). The market then turned and rallied to close 287 points higher! In the prior Alert, I mentioned the market was “oversold, but it is also emotional” – apparently, a true statement.
Is this rally impressive? Well, yes. A 287-point rally is almost always impressive. Yesterday’s rally, however, was not accompanied by strong breadth. There were fewer advances than declines throughout most of the day – it was only late in the day when that reversed to the positive. The Nasdaq closed the day with less advances than declines. This is not what a healthy rally is made of; and unless this changes quickly, you can expect the decline to resume fairly soon.
We have pointed out in the original Alert that we are in a period that has translated to market weakness potentially into November. We are wrestling with whether the four-year cycle low was seen last year or whether it is forthcoming. 83% of four-year cycle lows are 20% or greater in magnitude. We have gone the longest time in history without as much as a 10% correction. The last time we had a similar occurrence was with the four year cycle low expected in 1986. The market advanced smartly into 1987 and then set up a peak to trough “crash” of about 40%. This, too, is a year ending in the numeral 7. We have shown that years ending in “7” have an average pattern that has the market falling from August into November with amazing consistency – at least from 1897. Finally, the basic seasonality for the market is up from November to May and down from May to November. That is a generality, but currently it seems to have a lot of company with other studies pointing to weakness in this period.
Simply put, we are not in a time period that is conducive to the market robustly advancing – at least not for the next few months. This is a game of probabilities and the probabilities for this time period weigh against the bulls. The good news is that if the market follows suit and has a larger correction, this should set up an extraordinary buying opportunity. In the meantime, the market is comfortable with selling – something we haven’t seen for over a year.
One final thought: Steve Puetz did major research on the relationship between solar eclipses and lunar eclipses and crashes. The study is fascinating. Puetz discovered that virtually all the great crashes in financial history began within a time period of six days before to three days after a full moon that occurred within six weeks of a solar eclipse. Keep in mind that July 29 was a full moon and Aug. 28 will be a full moon lunar eclipse (be aware that all lunar eclipses are full moons but not all full moons are lunar eclipses) and September 11 will be a solar eclipse. I have found these time periods to be quite interesting (on occasion) in the past. I have a chart where I have entered these periods of solar and lunar eclipses. Some are less than exciting, others are incredible. There are so many factors leading into this current time period that this is just one more straw on the camel’s back.
It is apparent that I am not always aware enough to NOT make a “grandstand call,” such as the recent one in my last Alert. I have a tendency to believe things happen in three and with the Fibonacci low point (potentially a one-day affair); the opportunity for “three in a row” is on the table. Unfortunately, I don’t have any other major dates upcoming in my work. The July 19 day was strong and, so far, is potentially a meaningful top – that may have to suffice. My advice is to not fall asleep at the switch over these next few months – particularly late this month through September 11 (a six-year anniversary of “911”). The latter part of the “years ending in 7” period (mid September into November) can be powerful. These next three months seem to demand attention. Note: Frequently, the market rallies into Labor Day and beyond (Sept. 3 this year). If that occurs this year, it may set up an exceptional selling opportunity. Remember, discipline is the single most important factor at this point in time.
