Why P[3] is My Top Bear Count

First, props to one of my favorite Daneric participants, Souljester, for the suggestion.

It got me to thinking -- sometimes a dangerous thing, but always worth the effort.  Here's why I think P[3] is happening by mid-September at the very latest and before SPX hits 1436.

First, we all know the big picture.  We're nearing the .786 retrace (1381.50) of the Oct '07 highs.   A turn there would satisfy both Fibonacci and create a big, beautiful bearish Gartley pattern.

But, so what?  Couldn't we blow through there on the way to a .886 retrace?  Or extend to a gigantic Butterfly pattern at 1800?

I don't think so, and here's why.

First, the rising wedge that started forming in Mar '09.  It really firmed up in April 2010 and has been a reliable guide to daily swings ever since.  It's apex is around September 12 at 1436.   The last two multi-year rising wedges were 1998-2000 and 2003-2007.  They broke for 730 and 910 points respectively.  And, they didn't get anywhere near as close to their apexes as we now stand.

To paraphrase, "rising wedges been bery, bery good to me."  I know they're not foolproof, but I've yet to be let down by one in all my years of investing.  According to my Handbook of Wedgology, when we break it, we return to GO --  at 1010 or 667.

Second, there's the trendline that goes way back to the 1990's, seen on my very first blog on May 2.  It currently stands around 1408. Guess where it is on September 12?  Yep, 1436.  Coincidence? I think not.

Third,  the underlying economic picture.  I know, I know.  The stock market isn't the economy.  But, on a long enough time frame it correlates pretty darn well (as any 80 year-old would attest.)  I don't think anyone but a press secretary or a Fed governor would argue the economy's looking up.

Last, there's my own little concoction, the 87-day cycle.  We're not completely out of the May 16th woods, yet.  The 105th day is Thursday.  And, 105 was the longest period we've gone in the past 4 years without a good-sized drop (75 was the shortest.)  If it doesn't happen by Monday, then the drop from May 2 was IT.  At 73 days it would be on the short side, and at 4.3% it would be on the puny side.

Keep in mind that the study measured the 30 calendar days after each peak, so there's  a few days left to go if May 2 was it.  And, sometimes the study caught one peak, but there was a bigger one starting a few weeks later (such as May '09).

But, if May 2 wasn't IT, then the next 87th day is August 11 ( the 75-105 day range would be July 27th through August 28th.)  Again, this is in the waning days of the rising wedge.  It would dovetail nicely with those indicators.

There are other little niceties.  Remember the giant inverted H&S pattern?  It indicated an upside of 1436 -- hmmm, there's that number again...  I've also noticed significant similarities between the past few months and the tops in 2007 and 2000.  More posts on that to follow.

Bottom line, I feel strongly that the next 3 months will mark a major top -- although it could be as soon as this week.  Rarely do rising wedges grow this long in the tooth before the eventual decline; and, like I said, we're not out of the May 2 woods just yet.

We probably won't be able to characterize the drop as P[3] until after the fact.  Until then, it might be another significant correction on the way to QE-infused infinity.  But, it should be enough of a move so that wily traders can amass enough dough/gold/farmland to survive what I expect to be very difficult times.

Shoulda, Coulda, Woulda...

As the harmonics suggested last Tuesday, we broke out of the channel and are up 12 points this morning.  But, we need a breather after this morning's skinning of the bears.  Short term, the market's technically overbought.

We will need to digest a bit of the rise, pausing to retrace probably somewhere between the .618 fib of 1348 and a trendline found at 1350.  We've set up a small bat pattern that could take prices back to 1330 (our trendline from Oct '07) or 1332 (the .618 fib off the recent lows.)  This level also marks the 10 and 50 day moving averages and should provide good support.

Tight stops are essential, as we're within a mere 40 points of what could be the P[2] high of 1381.50 (although, who would be surprised if the 5th wave truncated?)  We're also still bouncing around within a wedge that dates back to Mar '09 and currently ranges from 1316 to 1392 -- a mere 76 points. Any misstep that drives us out of the wedge would spell the end of the bull market.

Anyone playing the upside here would do well to consider the metaphor: "picking up pennies in front of a steamroller."


UPDATED: 11:00AM

We're taking a breather, as expected.  Interesting that the pullback occurred right at a trendline (the dashed line below) drawn off the 3/16 and 4/18 lows.  We could look at the action since the recent lows as a backtest of that line.

Quite often, these backtests (off trendlines established by important pivot points) are the last up move before a substantial drop.  If we bounce hard and head back down, we will at least test the Oct '07 trendline, as noted above, and possibly even the rising wedge at 1316.

A likely scenario at that juncture would be an broadening wedge, governed by the dashed trendline above and either the Oct '07 trendline or rising wedge below.   Again, failure to hold the wedge would be disastrous for the bulls.

If, ultimately, we advance beyond the trendline and successfully backtest it, that could give us a base from which to advance to our 1381 target.   But, I don't think that's in the cards in the next few days.  If we close up today, it would be the 4th day in a row.  And,  we haven't had more than 4 up days in a row since the 2/18 top. 

Remembering...

        Michael J. Novosel was only 19 when Pearl Harbor was attacked. Determined to fly for the Army Air Corps, he was too short to pass the flight medical. His friends carried him around on a stretcher for several days in the mistaken belief that he might grow a little if spared the effects of gravity. It didn't work. But a flight surgeon, swayed by Mike's patriotism and enthusiasm, fibbed on Mike's physical so long as he promised to grow another quarter inch.

        Mike flew bombers over the Pacific during World War II, eventually commanding a B-29 squadron on the island of Tinian before he'd even earned a drivers license. He carried two cushions, sitting on one in order to see over the instrument panel and placing the other behind him in order to reach the pedals. He participated in the bombings of Tokyo, and later flew over the surrender ceremony on the Missouri.

        After Korea, Mike was RIF’d out of the Air Force – a victim of peacetime supply and demand.  He stayed active in the reserve, but focused on his growing family and a successful airline career.  He was moved when JFK encouraged Americans to "ask not what your country can do for you..."  And when Kennedy was assassinated, Mike watched as John Jr saluted his father's caisson. The bravery of that three year-old - the same age as Mike's youngest son, also named John - convinced him to request a return to active duty. The Vietnam war was heating up, and Mike couldn't sit idly by while others risked their lives.

        But the Air Force determined that Mike, at 43, was too old to fly. Undaunted, Mike asked the Army if they could use someone with his experience. They welcomed him with open arms – and a paycut. Joining the army meant resigning his Lieutenant Colonel commission (and pension) in the Air Force. He would have to enter as a warrant officer - the same grade as guys half his age.

        After brushing up on helicopter flying, Mike was sent to Vietnam and joined a new unit known as Dustoff. Before Dustoff, wounded men were treated in the field - less than ideal conditions for a traumatic amputation or a sucking chest wound. Dustoff’s Hueys fanned out across Vietnam and rescued seriously injured soldiers and civilians – both allies and enemies – resulting in a 97% survival rate for the 900,000 who were saved.

         Flying these Huey's was unbelievably harrowing. Crews' only protection from constant hostile fire was a quarter-inch thick, plexiglass windscreen and aircraft skin the same thickness as a soda can’s. They had little armor and no weapons. Strapped in tight, they had no way to duck or dodge incoming fire. Their only defenses were their flying abilities and the efforts of the grunts who came to know the “whoop-whoop-whoop” of an incoming Huey as the sound of life.

        Mike distinguished himself as a pilot and a leader. He taught FNGs how to avoid being shot down and how to fly via instruments (not a part of helicopter training at the time.) Along the way, he also gained new perspective on the realities of war. He had gone from flying bombers high over a target to being in the thick of a brutal, bloody war - constantly being shot at, witnessing horrific injuries, hosing blood and body parts out of his Huey after each mission. The contrast could not have been greater.

        By then, Mike's son Mike Jr had grown up, joined the army and become a pilot. As anyone who's seen Saving Private Ryan knows, brothers can't serve together. However, the army sensed a public relations opportunity in having father and son fly together - the first time in US aviation history. So Mike Jr joined his dad’s Dustoff unit in Vietnam.

        A father’s worst fears were realized when, several months later, Mike Jr was shot down (one of six times.) He was rescued, of course, by his father. A week later, Mike Sr was shot down and rescued by Mike Jr.   In all, Mike Sr flew 2,543 missions and rescued 5,589 wounded. He was later awarded the Congressional Medal of Honor for flying fifteen times, without air cover, into an enemy training facility to rescue 29 South Vietnamese soldiers who were pinned down by enemy fire.

        When Mike retired in 1984 - from the Army this time - he was the last former World War II pilot still on active flying duty – the last Eagle. When I first met him, he didn’t strike me as much of a hawk as war heroes go. After getting to know him, I understood. Unlike many Americans whose perception of war is shaped by CNN or Fox - a puff of smoke, viewed from five miles high - Mike saw the victims' faces, heard their screams and was soaked with their blood. As a result, he understood war was a last resort, when all else had failed.

        At the time of his retirement, Mike's awards and decorations included The Medal of Honor, Distinguished Service Cross, Distinguished Flying Cross with two Oak Leaf Clusters, Bronze Star Medal with two Oak Leaf Clusters, Air Medal with “V” Device and 60 Oak Leaf Clusters and the Purple Heart Medal.  He was proud to have been awarded the Medal of Honor for saving, rather than taking, lives.  But, he considered his greatest awards the countless simple nods of thanks he received from men who would otherwise have died in battle.

     

        Mike Jr. went on to an illustrious aviation career as well.  He inherited his father's call sign "Dustoff 88" and his determination to make a difference.  During his tour, he flew 1,736 missions, earned 37 air medals and rescued more than 2,500 allied airmen, sailors, soldiers and civilians -- also exemplifying the motto "no man left behind."

 

        Mike Sr. passed away in 2006 after a tough fight with colon cancer.  He was laid to rest a stone's throw away from JFK at Arlington National Cemetery.  Mike Jr. passed away in 2009, a few days after receiving his father's Medal of Honor flag in a ceremony at his home in Florida.  Those fortunate to have known them will miss their fearlessness, their compassion and their uncommon wisdom.

Mike Sr. is awarded the Medal of Honor as Mike Jr. (far right) looks on

Michael J Novosel's Medal of Honor citation

Wikipedia page

The Novosel Foundation