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Buying Climax or Continued Runaway?


The market may be on the verge of a turning point.

The SPX is more stretched above its 50 day line than at any point in 4 years.

That alone suggests a pullback is in order, but in tandem with the daily arc chart sent yesterday suggests the tape is ripe with risk.

What's changed in the last month? It's not more dovish expectations for the Fed. If anything that's what sent the market south from September 17. Moreover, the chance of a December rate increase has risen -- seemingly inextricably so with the ballooning of equities to within a whisker of all time highs. Now the Fed wouldn't want to incite a bubble would it? Only if that helps their balance sheet which it does. At this point my gut is that the Fed is so trapped what with the economy showing a puny recovery that the Fed's primary consideration isn't even its constituency, the big banks, anymore, but itself.                                                                                    

While current momentum has  bulls lathered up for an immediate breakthrough above the 'dome' from yesterday's chart, there is yet another potential square-out on the SPX in sight -- to wit, 2120 is opposite November 3-4. Did we get close enough for government work on Tuesday?

In rallying toward 2120, the SPX is more stretched from its 50 day line than at any time in at least the last 4 years.

(Click to enlarge)

The 50 day moving average is currently at 1986 with the SPX closing at 2110 -- a spread of 124 points. Interestingly, the 50 day is where the last daily Plus One/Minus Two buy set up occurred on 10/14.

Remarkably, the mid-point of the entire 248 point range from the 1872 low on September 29 to yesterday's 2110 close is also 1986.

Is the agenda for a pullback to the 50 day moving average and the mid-point to 1986?

Let's take a look at the rally through the lens of the weekly chart.

The 3 Week Chart turned down on the week of 6/8 right on the heels of the May all time high.

The SPX went into a weekly Minus One/Plus Two sell position on the week of 6/22 following 2 weekly higher highs ---as soon as it was possible to do so. That says something. The market was talking.

The 3 Week Chart remained pointing down and the next opportunity to go into a weekly Minus One/Plus Two sell signal played out as well on the week of July 20th.

Importantly, the week of July 20 left a bearish outside down reversal week---with the prior week setting the all time closing WEEKLY high.

Another weekly Minus One/Plus Two sell setup played out from mid-September eliciting a test of the lows.

Following that test the index turned its 3 Week Chart back up on the week of 10/19. This played out when another weekly Minus One/Plus Two sell failed to reject the rally. The market was speaking when it remained in rally mode following the turn up of the 3 Week Chart.

However, now the SPX has rallied back to the low of the high bar week -- 2120. And as offered yesterday, 2120 is straight across and opposite November 3rd/4th for a possible turning point -- especially with the index so extended from its 50 day line.

Conclusion. July's test of the May high perpetuated a large decline. September's test of the August low perpetuated a large rally.

Now the SPX is testing the low of the high bar week at a time when the vast majority of players expect 2134 to be exceeded right here, right now.

Just like most expected massive resistance at 2040-2045 to turn the market back. We stated that either the SPX would be substantially shy of that resistance or would knife through it and go much higher quickly. It has done so.

Does Mr. Market have a trick up his sleeve with most players expecting the 2134 all time high to be exceeded right now?

Strategy. While it would have been nice to have caught the SPY for a long pull in early October, we stayed out of the way of the short side and are off to a great start on individual names in the 4th quarter---on both sides of the market.

In that same spirit, our EOG long swing from Tuesday is working well. Ditto our intraday alert to short RACE near 55 yesterday.

The market benefitted from the strength in the oils yesterday -- including big cap CVX which boomed this week. Oil is approaching the high of the low bar day from its recent swing high and if successful that could elicit another test of the 200 day acting as a further tailwind for the SPX to fully test the key 2120 level. So we want to watch oil for guidance. If oil is rejected from a test of the low of the high bar day it could be a tell for the SPX at 2120.

On August 21, the market began to crash  90 days/degrees from its May high. It will be interesting to see what the trajectory is another 90 degrees in time from there around November 21 and the 7th anniversary of the crash low in 2008.

Twitter: @JeffCooperLive

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No positions in stocks mentioned.

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