Markets had a 12% correction, and that appears to be it. For now. The Dow is in the process of violating a perfect setup where it could’ve jumped off the ledge. Here’s a lesson I learned about 14 years ago. Unlike many who got their training in the old Internet bubble go-go days, I cut my teeth in the bear that followed. It may have been easier to make money on the drop as opposed to the rise. In those days all one had to do was short the ND (big Nasdaq contract) around midday and wait out the bulls. Many days it would consolidate across the screen until the last hour. Then it would drop like a rock. In the early part of 2001, if memory serves me correctly the Nasdaq dropped something like 800 points within six weeks. If I’m wrong I’m not off by much.
So, why am I telling you this? The bill for me came due in 2003-04. Many times, during this brand-new bull market, the pattern would come right to the ledge but unlike the good old days, it would not jump. I didn’t understand it and obviously got stopped out a lot in those days. The lesson was tough but here it is. The biggest difference between and a bull and bear market is when the market comes to the ledge, it doesn’t jump. It came to the ledge last week. I’ll prove it to you.
Using my cutting-edge methodology based on the teachings from Gann around 100 years ago markets seriously square out in many shapes and forms every single day. We are not doing esoteric wheels that take rocket scientists to figure out. Simply put, when price and time squares out the pattern changes direction. Like the time windows I’ve been doing for years, they are subject to override given a stronger underlying move.
So, it happened last week we came to a situation where the Dow started dropping 117 hours off its 26616 top. You can see from this early hourly chart (below) that on Monday morning the potential drop with the two red bars from Wednesday, which not only were 117 hours off the top but also 16 hours from prior small high. If there was ever a perfect square out, that was it. Don’t get the impression these square outs don’t work. The message the market is telling us is this a very high probability place it would drop if it's going to drop. Of course, we could get a better square out but given the 616 vibrations in the top the Dow would be hard pressed to get a better one. I warned those who were bearish last week this could happen. Why? I’ve been there and done that. I’ve learned the hard way in a different lifetime.
So, where does that leave the bears? At this moment they are not even winning the interest rate debate because the 10-year Treasuries is bouncing giving everyone some relief. The bond market psychology is very tricky. On the inflation reports people first got scared but realized a whiff of inflation means a better economy. But too much inflation will have the opposing impact. Likewise, when rates take a break people like it. But too much of a good thing can be interpreted as a weakening economy and the market will get hit. Better stick to the charts. Psychology is very fickle.
There is another problem and all I’m going to say here is a storm is brewing. The FISA memo was the down payment. How many of you have joined the Q crowd? There is a debate among some whether QAnon is real or just some high-level misinformation campaign. There is a group of people who spend all day interpreting it because a lot of it is in code that isn’t too hard to decipher but it takes more effort than a stock market guy has. But I will tell you this. You can find people on YouTube doing a good job interpreting this stuff. What I’ve found is the people who follow this stuff are some of the best-informed people in the country.
I believe Q is real. All I’m going to say right now as far as it relates to our stock market work what could be coming down the pike won’t save bears now, but the country could be in for a rough ride later in the year. The wheels of justice grind slowly but what I’ve heard is that Sessions is working behind the scenes. If that’s true, we’ll get another round of scandal that will hurt the country. My next big-time window for the stock market hits roughly near the middle of July, around the 11th, which will be 610 days from the February 2016 bottom. I told you when the FISA memo came out after the Dow 610-day window we could go through the whole thing again later in the year. This can’t be a prediction but something I’m keeping an eye on. After all, when the time window comes calling, the news event happens to manifest, almost by magic. What I’ve told you probably doesn’t impact markets today or this week, but you need to keep it in the back of your mind and don’t get complacent about it.
These are mighty strange times we live in. For those of you who are Godfather fans, do you remember why Tom Hagen was replaced? He was the peacetime consigliere. For those of you who’ve been following these posts through the years, you probably realize by now my 40+ years of studying and watching documentaries like the ones you’ll find on The History Channel have prepared me for this time. Additionally, I’ve read hundreds of books on the two World Wars and have taken the time tying it to the market charts which I share from time to time. It has prepared me well for a time none of us ever thought would happen.
You might say we are not in a major war yet. Have you been paying attention to the Middle East? The confusing part is some of these alliances seem more in line with World War I than WWII. The wild-card is Israel which did not exist in 1914. Clearly, tensions are running high and now that the Olympics are over the rhetoric on the Korean peninsula will also heat up again. As traders, we need to be more in tune with the patterns now than ever before because they give us advance notice. Realize my 610-day window hit before the FISA memo came out. Right now, markets are stabilizing again but what you see today may not help you next week or next month. So, we covered a little of everything today. There is a lot on the plate.