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Jeff Cooper: The December Low Indicator

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China sneezed on Monday and the rest of the world got a cold.

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China sneezed on Monday and the rest of the world got a cold.

Another bad Thursday/ugly Friday led to a Black Monday.

Whether this turns into an epidemic is the question.

This was the worst start to a year since 2008. Several times in the last few months, we've questioned whether the SPX was just being jockeyed back and forth waiting for the plug to be pulled in January -- just like 2008.

Clearly, the big winners like AMZN were emblematic of the idea of winners being jettisoned in the new year.

Before the open, we sent the daily AMZN below showing the vulnerable position it was in.



AMZN hasn't taken a breath for months.

I did not know it would take such a big gulp of air on Monday.

Be that as it may, the action in AMZN underscores the power of the Square of 9.

That is how stocks/markets react to genuine square-outs: they turn with authority as if they've run into a brick wall.

That brick wall for AMZN was a time/price square-out of 697 and late December.

As offered in an intraday note Monday morning, "AMZN triggered a Late Stage High Level breakout last Tuesday and Monday's gap is continuing below its 50 day line. From a new high all time high to below its 50 in 3 days is brutal price action."

How brutal?

180 degrees down from 697 is 646 and AMZN knifed meaningfully below 697 on Monday.

The next 90 degree decrement down is 620ish.

A full 360 degree revolution off last weeks ath ties to 596."

596 ties to a pullback into gap window from October 23 coincident with the July 23 spike high.


Click chart to enlarge



It will be interesting to see if AMZN mirrors the action in defining a low when it gapped below its 50 day line on August 24. If not, it may be a tell for further market weakness. There is a difference between AMZN's Monday gap below the 50 day and that off August 24. The plunge below the 50 on August 24 came 21 trading days after a high. Monday's momentum gap was directly off a high and importantly followed a breakout over a near 2 month Slim Jim (a flat consolidation).

Consequently, the immediate reversal below the breakout (underscored by doing so on a large gap) triggers a Boomerang sell signal.

Lots of AMZN window dressers are probably trapped. The pattern has done technical damage and probably means AMZN has work to do.

While the mainstream media must find a culprit for the selloff, the reality is the news breaks with the cycles -- not the other way around.

When is the last time you heard a financial pundit say 'cycles are exerting their influence on the markets today'?

The popular consensus is that a slowing China was the culprit. But is that a revelation?

I even heard someone place the blame for the selloff at the doorstep of a new regulation in China that is going to tax 'spoofing' -- conspicuous pulling of bids and offers, something designed to undermine HFT's. However, this regulation won't even go into effect until 2017. But, it was supposedly responsible for Monday's debacle in China?

From my perspective, it seems more likely that the market is taking very seriously the escalating tensions between Iran and Saudi Arabia.

The market may be intuiting that the proxy wars between the two are going to go direct.

Watch oil.

Be that as it may, our late December turning point hit with authority being 90 days/degrees up from the late September test low. The tensions between Iran and the Saudi's coming to a head 90 degrees from the late September end of the Shemitah is something that can't be dismissed out of hand.

A 'hounds of hell' setup may be unfolding with technicals, geopolitics, and economics converging.

Technicals visa vis divergences between the indices and weak internals have been present throughout most of 2015. World economies are slowing and geopolitical crises are deepening.

I'm not so sure these are just bricks in a wall of worry.

The consensus seems to be that this is just another 3-day fire drill like August and that Central Banks will save the day again.

The last hour clearly looked like an orchestrated squeeze back above the key 2000 SPX level. That said, the shorts traded shorts with the shorts into the bell and the futes are right back down this morning.

An hourly SPY from mid-December shows Thursday left a close below a neckline of an Head & Shoulders topping pattern.
The projection down ties to 200 SPY (2000 SPX).



The SPY undercut December lows and clearly the last hour rally recapturing 200 SPY was an attempt to suggest an undercut low may be playing out.


Follow-through could see the 202 level tested. Above that, the neckline at 204 could be in play -- AS LONG AS IT REMAINS ABOVE 200 (2000 SPX).

Below 2000 SPX opens the potential for an extension to 1950ish -- possibly as early as this week.

Why? 1953 is 360 degrees down from the all time 2134 high.

That said today/tomorrow align with 1997.

If the index carves out higher lows intraday on the 10 min and hourly charts with this 1990ish area holding it could perpetuate a rally to 2042 this week.

Why? 2042 is 90 degrees up from 1997 and square this week.

Conclusion. Trade below the December low in January is typically a bearish harbinger.

In this case, bearishly, it happened on the 1st trading day of the new year.

Trade in January below the prior December's low occurred in 2008 and in 2000. In 2000 a rally played out---a big one into March--- but ultimately, trade below the December 1999 low in January 2000 proved to be a bearish signal.

The 7th anniversary of the March '09 low should be a magnet for the market this year.

Additionally, the rule of thumb is that as the first 5 days of January goes, so goes the year.

Interestingly, on the Square of 9, the first week of January is obviously straight across and opposite the first week of July -- an important 'vibration' for the US -- what W. D. Gann would call a master square. Note that the other dates on this master square are the first week of October and the first week of April. The first week or so of October has been huge for the markets this century.

So the behavior this week is going to be crucial. Is it a misdirection week pulling back the rubber band for a sharp rally or is the plug being pulled ala 2008? That is the question.

As long as the SPX stays below 1990/2000 and the December lows it is in a vulnerable position.

Can we get a clue from the pattern of the last few months?

Checking the SPX dailies shows a potentially constructive pattern of 3 drives to a low -- November 16, December 11, and now.



However, remember that the SPX staged a false breakout on back of a Santa impersonator into December 29. So, the current slide is the result of that false breakout and the conceptually correct notion that fast moves come from false moves.

It seems the short straw that the SPX will be able to mount another attack of well-defined resistance at its 50/200 day moving averages anytime soon.
 

Twitter: @JeffCooperLive

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No positions in stocks mentioned.

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