The dog days of August and that one last trip to the beach are over. If the heat wave that enveloped California this weekend is any indication, September promises to be one incredible month. However, before we go forward, let us take one last look at the week that was:
As you know, my stance coming off the August low was any bounce would survive long enough to make it into our major cycle points that commence the day after Labor Day (finally today). Heading into last week, we were retesting the 61% retracement level of the move down from July across the board. The NDX actually hit it, others were a little short and the Australian charts were a little more. On average, it was a decent test of the line. Last week we had violent reactions both ways where lots of folks got all worked up over the light volume. What usually happens in the last week of August are light volume nothing days that bore those of us still in front of our screens to tears. This year, it was the polar opposite as we got the kind of roller coaster action to make up for the last 10 Augusts. What was the net result? We ended the week only slightly higher than where we started. The road less traveled with the usual result.
What happened on Tuesday's lighter volume meltdown was the charts retraced 38% of the move up off the low and also bottomed in the 61-hour low-to-low cycle as readers were told in Tuesday night's update. At that time, I suggested we had a high probability reversal coming on Wednesday but did not know if it would have spiked down at the open. You can never know these things for certain ahead of time but the markets did a very nice job of protecting 38% stops, which also happens to be the minimum technical retracement for a bullish move no matter how violent it appears. As it turns out, the markets took care of business quickly and turned back up.
The original outlook back on August 17 was we would have a leg that would test anywhere from the 61% retracement level all the way up to the July resistance levels. As we enter this very important time window, we are exactly in this zone. For those of you who will read the September hard copy of this magazine you will see my ongoing coverage of these time windows. The challenge with a time window that is six weeks long is determining the exact point where we could top. Those of you who have been readers of my work may recall the last time we were in an important time window. Back in the spring of 2006, we hit a time window where the smallest degree was the daily time frame. There were no less than six calculations that could have topped the market out but this was over a three-week window. The exact dates are not important here but two high probability dates were outlined at the time and the markets elected to stretch the rubber band to maximum levels by picking the last one before reversing. That big window caused the correction that led to the June/July lows. This time I have outlined a couple of key areas. One of them comes around the Autumnal Equinox in the September 21-24 period as this period overlaps the two big cycles. The other comes on October 5, as we will be 55 days off the July high and 144 days off the March low.
It doesn't have to be this way, because by Wednesday we will be 13 days up and in the 34-day window off the July pivot. We will also be in the 120's off the March low. What this implies is important time windows materialize at 121, 123 and 127. We enter a period where conditions are ripe at anytime going forward for a major reaction to the downside. How this plays out, none of us can know. Keep in mind there are many possibilities that range from an acceleration to the upside to an acceleration to the downside right out of the gate. Why do I say this? Simply put, we don't know which of these windows are going to create a top or a bottom. We could top this Wednesday at July resistance and bottom by September 24 or October 5. We could also accelerate here to the upside if the market elects to choose one of those dates as a blow off top.
If history were any indication, I'd look for continuation of the trend into late September as I stated in the September issue on the Market Strategy page. Those of you who will read that need to realize it was written as July turned into August and my stance was the highest probability was the late September pivot would create a secondary high. Nothing has really happened to change that view even though we've had violent reactions in both directions since then. Keep in mind that was written as the initial leg down from the top was breaking near term support levels but I didn't think we would be down for the 11 weeks in a row that would have been needed to create a bottom by late September. Although that is still technically possible, market tendencies suggest in a time window of this magnitude that the rubber band will be stretched to maximum levels before breaking.
What that means in terms of playing this market is to have greater vigilance than normal. You can't be complacent here nor take anything for granted. Anyone who is long this market needs to keep tighter stops than normal. What does that mean? It means you need to monitor your trades everyday and be ready to raise your stops in the middle of a session. Keep in mind that if we wake up one morning and the Dow were to gap down 300 points your stop is going to be hit at the place where the gap stops going down, not in the air pocket where you may have placed it. Be aware of Fibonacci extension levels and take your profits near them. Make a greater effort to take profits into strength while you can as opposed to accepting what happens after the event already starts. If the rubber band is stretched, euphoria will become part of sentiment again. You will want to be aware of 1.618 or 2.618 levels of last weeks drop or if we somehow take out the July high, the entire drop. I can usually be more precise but we are in a large window of opportunity.
As traders return from vacation, we could have a feeling out period to start the week. I doubt cycles would reverse on Tuesday but as I said we conditions become ripe by Wednesday. We had another surge of new readers in the past week, for those of you reading your first column, welcome aboard. This column is usually posted every Monday morning. Also, look for me on Commodity Classics/MN1.com on Thursday's at 4:45 EST.
