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Wednesday, April 21, 2010

The Battle of Lehman Day

A while back I made a conscious effort to look at the "tape" of the market through the eyes of a cold calculating algorithm-driven supercomputer.  It dawned on me like a lightbulb one night that the "tape" paints key days and lays them out like a map or plan or marker.

The recent pullback had in fact bounced off of the top of the "triangle breakout day" (marked in blue with number 23).  And then today's late bounce found support at the gap of yesterday's strong advance day gap up support (marked 24).  It is my observance and opinion that if the market is to make another run at a new high on this wave structure, this recent gap created will either stay open or not be closed under (or a close under the 20MA is likely to occur)  If it does, I expect a further decline to come.

So indeed the market has painted a tape for us to map and it was no wonder that the gap support was bought this afternoon. It was a logical, coldly calculated risk/reward spot.  The computers rightly bought, they are unthinking machines playing any and all odds. It is now up to the futures-bots to maintain overnight support....

But the market is showing signs of exhaustion. We have super-bullish sentiment marked with some nasty bearish sell spikes which may be signalling the market wants to turn down.  Any bearish close (like under the 20MA or under this key day will trigger weakness is my bet. And the computers should likely react accordingly.

We also have a negative map of the 2008 crash painted in reverse. Instead we would use big red days as "key marker" days.  I prefer the Wilshire 5000 in this case because it neatly has candles that have achieved certain objectives all in one candle. And its the complete market so-to-speak.

The market has come to a battle zone of the 2008 mapping where the market is trying to "reverse" and re-conquer one of the most infamous days known in the markets: Lehman Bankruptcy Day of September 15th, 2008.  Although the market was not doing well since the October 2007 peak to that fateful September day, market internals had yet to unleash a truly ghastly, grizzly down day until that spot.

Lehman BK Day changed all that.  It was the first nasty, gnarly market internal down day painting a 22.48 down ratio volume and decliners ended up being the second worst day to date of the bear market since 2007. This day, using the Wilshire, also drove and then closed the Wilshire under 3 key days: The March, July and September 2008 lows.  So in one fell swoop, this day damaged everything and left a mighty scar.

In a way, P2 is very much about re-conquering one bad bear day (that occurred in P1) at a time.  And that it has right up until Lehman Day of which now the market is engaged in battle in. Oh sure, certain indexes have broken above their equivalent day like the NASDAQ, but the total market has still not accomplished a recapture of this most bearish day.

I have theorized that bear wave two's of any degree is the market trying to recapture and directly challenge the "point of recognition", holding, and then erasing it from memory and keeping the bull trend going.  (If it could accomplish all that, it ceases to be a wave two would it not?) In this case, perhaps Lehman BK Day was the true "point of recognition" moment for the 2008 crash as everything certainly changed after that day. 

Of course if a wave two could recapture and repair this weak spot created, it wouldn't be a wave two. It would be something else. Thats why every time we project a "wave two" to occur and it recaptures that little point of recognition moment and holds it and then builds upon it, it ceases to be a wave two and the market forms some other pattern and the trend keeps going (in this case up)

So here we are. This Primary Wave Two [P2] is challenging finally what is arguably the last (and ironically the first) gnarly bear day of P1: Lehman Day.  

I surmise that when a wave two, of any degree,  fails to capture this "point of recognition moment/day", it confirms that it is indeed a wave two and then proceeds to turn into a wave three which is usually a thing to behold particularly in a nasty bear market.  

So it is of no irony that my long term charts have painted a patten that has indeed marched up to the potential final last Minuette wave squiggle that could mark the top of the stock market for a generation to come. It is of no coincidence that we call this a wave two of primary degree, or P2. And it is of no coincidence that its greatest struggle may be in the re-taking of Lehman Day.   Like Pickett's charge on the third day of Gettysburg where the Union defenses were briefly breached, the breach was in vain and the invaders were slaughtered.

And it is predicted, that if this is truly P2, the market will utterly fail to hold a re-taking of Lehman Day and if it does, it will be only briefly. P2 will then proceed to do as all other wave two's must do: Transform into a wave three.

So when people ask me "what is your "Uncle Point" for P2"?  I'd have to say the re-taking of Lehman Day in a nutshell for all the reasons I laid out above. Now sure, I could allow a flash in the pan or a brief period where it hovers above, but all in all, P2 should end somewhere around here to be sure. And my wave count conveniently works out for that to do so.

I also am looking for a hard turn. An outright rejection of the thought of the market marching on much higher than Lehman Day.  

It can also be seen that Lehman BK Day is "protected" on its front flank by the September 19th rally peak. This is the only day to ever close above Lehman (as measured in the Wilshire). Although the next day, the 23rd, was a big red candle, notice the down volume and decliners were not a terribly gnarly day by P1's standards. Thats why I look deeper to Lehman Day as being the true day this market so desperately wants to triumph over the land saying "We Conquered the Bear".

I don't see P2 ending on a whimper (although the market is never wrong no matter what it does). I can imagine a tremendous burst of market energy that is almost upon us in an attempt to recapture the key resistance days of P1. 

And like Pickett's fateful charge, there may be a brief moment of hope, but we know that ended in a bloody slaughter. 

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