The Tax Plan: Did They Just Sell the News?

04/27/2017 2:49 am EST

Focus: STRATEGIES

Jeff Greenblatt

Director, Lucas Wave International, LLC

The rebound in recent days through Wednesday proved we are dealing with a freight train, asserts Jeff Greenblatt.  He’s the director of Lucas Wave International and editor of The Fibonacci Forecaster.

In the course of a month, market cycles ebb and flow. Nothing goes straight up and in the past few years we’ve learned bears would be lucky if it went down at all. That being said, last week (ending April 21) markets once again came to the ledge and refused to jump. Aside from 2011 and 2015, it has been the rule as opposed to the exception.

This time a rumor circulated the US House of Representatives were working on a plan to resurrect the health care plan. Never mind what that plan was, the market had a deeper objective. Our representatives have told us there would be no tax reform without health care reform.

So, it should surprise nobody later in the day Secretary of the Treasury Steve Mnuchin said there would be a tax reform proposal on the table by Trump’s 100th day.

The markets loved that and technically recovered. The divergences outlined in this space over the past couple of weeks healed and many sectors participated. It didn’t hurt they got what they wanted when the centrist candidate Macron nosed out Le Pen to win the semifinal round in the French election.

The market even added on Tuesday morning when a group of Dow stocks like MCD, CAT and MMM had decent earnings before the bell.

It came as no surprise on Wednesday (April 26) as Mnuchin did come out with the actual tax proposal the market ended up selling into the close. The crowd loves to buy the rumor and sell the news.

Is there more going on here? The recent rebound proved we are dealing with a freight train. Market conditions were ripe a week ago to drop but did not. It can be extremely foolish and dangerous to advocate a contrarian view at a time like this. I don’t make predictions, traders should never do that. I’ve learned a long time ago one can be a hero or make money but chances are both will not happen. My role here is as market observer and point out the risks.

My question is whether it was just a sell the news day or is something bigger going on? To answer that question, I must consider recent cycles.

As we know, the various indices had different bottoming dates from the 2015 correction. Most of the market bottomed on February 11, 2016 while the Transports bottomed on January 20. But do you remember the Dow bottomed back on August 24, 2015?  Our DIA chart simply represents the cycle. Many originally believed that was going to be the bottom.

chart

Why is it important? It is because Tuesday was a Fibonacci 610 calendar days from that low. The 610-18-day window is always interesting because markets have been known to make important turns in this window. 618 represents the golden spirals. Once again, the freight train has a chance to change course anytime from now until next week when 618 does hit. That doesn’t mean they have to, it means they can. Realize markets will not turn without a good cycle point, square out or vibration. For instance, we know the Dow turned last time at 21169 at 170 days off the Brexit bottom.

If it doesn’t happen, there certainly could be a vibration that will develop we do not yet know about. But let’s play it straight, if the market does not elect to turn in the next week, the next good looking cycle point is in June near the seasonal change point.

At that time, the week of June 18 (once again 6:18) the markets will be 432 weeks off the bottom in 2009. The significance of 432 is in terms of Gann, it is a multiple of 144 and all of them are important. Not only would it be a Gann point, it’s a natural time of the year for markets to turn.

When both seasonal and cycle points line up, one ignores it at their own peril.

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