Bears must be careful too

October 13, 2014 03:32 AM

You have seen what happens when the blood moon meets Mercury retrograde? That was last week. Once again, just like April the market sold into the blood moon and by Wednesday they took back most or all of Tuesday’s losses.

Here we go again? Not quite. When it comes to financial markets, the sequel usually doesn’t live up to the original. By Friday it was confirmed the blood moon would not be creating any bottoms this time around. It was interesting watching the media look for reasons as to why there was so much volatility in the week.

A blood moon is really nothing more than an eclipse, and we know from the past that an eclipse has the power to shred a pattern. We’ve also seen for years and years how the three-week Mercury retrograde condition shreds patterns. What about when the two line up together?  How about when it happens on the 144-month anniversary to the 2002 bottom?

You can go back to the archives. On July 21 I wrote, “Waterfall event in stocks inevitable.”  I gave it wide latitude of a year but have you seen the SOX? It’s down over 15% off the high on September 19 and over 10% since Wednesday.

The SPX might only be at its 200-day moving average but many areas of the market look a lot worse. I doubt whatever is materializing is over yet.

Most people are still scratching their heads about why this is happening. A global slowdown is being blamed. I don’t know about that. All I can tell you is we finally reached a peak in sentiment on Sept. 19 at the Alibaba top. The SPX turned at 66.5 months after it bottomed in 2009 at 666. So that’s a near perfect price and time square on a huge monthly time frame. Honestly, these are not the kinds of readings we see very often. I think people have finally had enough of dealing with scandals, ISIS and now Ebola. If you watch the news it tends to grate on you after a while and it probably does hurt confidence. If people are feeling sour about things they tend to want to sell stocks. Social mood turns first, and then the economy starts to slowdown.

As far as my July 21 column goes, I told you I’ve seen this movie before. In 1999 Aunt Mary and uncle Bob, who knew nothing about trading suddenly quit their jobs to be professional day traders. To be sure they didn’t come back but in this lower volume but high intensity environment they were replaced by a bunch of slick programmers who became arrogant enough to think they can predict every intraday 12-24 hours out with near certainty. Sure they can do it, only when you mistake a bull market for brains.

Folks, nobody can predict each move in the market with near certainty over the long haul. Due to the nature of quantum physics, it’s just not possible. Over the next year and maybe sooner, the market is going to correct that perspective.

My clients and I have been preparing for the past week although we didn’t even realize it. Look at the SPX. It has what I call an ‘explosion technology’ working. I’ve been teaching on this technology for quite a while. What’s an explosion? I got this revelation almost a year ago from a sequence on the Copper chart. Last Tuesday was a red bar, big down day. Wednesday was the big green bar which basically reversed Tuesday and gave us the impression the blood moon might be doing the same thing on the sequel that it did in the original. But it wasn’t to be. The market is very unstable for the reasons we’ve discussed. Wednesday was likely some short covering because the bears have been preconditioned over the past three years to take what they can get and run.  The Fed minutes were also released and were supposedly very dovish. So there had to be some panic buying coming in as well.

Thursday was the polar opposite. If I was a bull (I wasn’t) who got in on Wednesday after the release of the minutes by Thursday that trade literally blew up in my face. The bulls were under water before they knew it. That’s why I call it the ‘explosion technology.’ I think every trader has been there at one time or another. We see a version of this happen almost every single day on an intraday E-mini S&P 500 (CME:ESZ14). What happens with this sequence is that once it materializes for better or worse, that formation either becomes very good support or resistance in the future. In this case, since it broke to the downside, it’s very likely going to become resistance. Why? Bulls are now traumatized at that level.

I wouldn’t be the least bit surprised to see it get tested right out of the chute this week. Why should it be stiff resistance? Fool me once, shame on you.  Fool me twice, shame on me. This looks to be an area where bulls are finally giving up and right now the bears own it. I’ve seen it over and over again.

So if that’s the case, even as the action has dropped the way it has, it’s actually setting up to go lower. If you look as the psychology going on, people don’t seem too worried about it just yet. Some people are actually calling the Russell being in correction territory because it’s down 13%. So what are they going to do, wait until it’s down 20% to call it a bear?

A failure like the one we had this week is already bear phase activity. So where do we go from here? If you are short, you just can’t get complacent like the bulls were. You don’t have that luxury. I know some of you want to have a serious bearish agenda and have been waiting for something like this. Let’s just take the SOX for a minute. This is the worst it has looked in a long time. Then the SPX, this is first time it has touched the 200-day moving average since the correction in November 2012.

It appears my hypothesis that all of the other potential corrections came up short because the market was surging to the big time window here at 144 months off 2002 and 987 months off 1932. So this is already one of the bigger ones in the past couple of years. You need to take this one step at a time. We need to see what happens on a retest of last week’s explosion. If that happens and resistance holds then we could be in a situation where we look out below. The potential for it is there but one has to assess if this is the one it should be behaving a certain way. So far it’s playing out the way a move with such big readings should be playing but for that to continue last week has to become a barrier to a bullish recovery. 

About the Author

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.