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Jeff Cooper: An Inflection Point May Be Crystalizing


The cycles indicate that the market could be reaching a turning point.

I still can't believe that the Fed will shut down QE in a few months. The stock market is obviously aware of this, but has chosen, so far, to ignore it. The choices ahead are -- the Fed will continue QE, or at some juncture ahead, all the smart boys will all rush for the exits at the same time. How this will all work out is a mystery to me.
-Richard Russell, July 20, 2014

"The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know."
Alan Greenspan, July 30, 2014

There is a serious drought in California.

One day it will rain.

When that is, I do not know.

All I can say is, it's not easy being green.

Looking at Robert Shiller's Cyclically-Adjusted P/E Ratio (CAPE), it's apparent that risk is running high by historical standards.

However, there's nothing to say that risk cannot run higher and longer from where we are. Be that as it may, this is one of the highest readings in history.

That said, if the S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI) were going to do the melt-up thing this summer a la 1929 or 1987, it would already be in full-swing and it's not.

Both those years saw late August peaks (September 3 in 1929) following 90 to 100-day runaway rallies.

The return rally test of the highs in 2000 also peaked at the end of August.

On one hand, market participants seem fixated on the idea that the advance must end with a bang rather than a whimper.

On the other hand, the longer it takes for the presumed melt-up to kick in, the more antsy players are likely to become -- especially if a climax run hasn't occurred by the end of August.

At that point, the emphasis is likely to shift to protecting unrealized gains.

There seems to be another well-held belief at the heart of this advance: that the market will offer a graceful exit. The market usually offers a graceful exit, but not ALWAYS.

When I say 'end of the advance' above, I am referring to whatever peak plays out prior to a significant correction. By significant correction, I mean 20% or greater.

Following such a persistent run without a meaningful setback, when a significant correction happens, it will only be the subsequent price action that will tell us the position of the market -- whether it's a bear market or a buying opportunity.

On Wednesday, the SPX closed below 1973 (the number of days from the March '09 low) for the second day running -- not meaningfully so, but one good down day could snap the 1955 low from the 7/17 distribution day and the 50 dma.

Yesterday, we flagged the potential significance of the first week of August. The SPX is hovering just above the lows for July. The likelihood is that early August will see the Monthly Swing Chart turn down on trade below July's lows. That price is currently 1952.86.

So there is a lot going on between 1952 and 1955. Additionally, 1947 is 90 degrees down from the 1991 all-time SPX high on July 24. It is worth considering that 1991 and July 24 are straight across and opposite on the Square of 9 Time & Price Calculator for a possible square-out. That may have been a very important high. Interestingly, the last week in October is 90 degrees square July 24 and 1991.

October debacle?

A break of 1947 with authority suggests an extension below the 50 dma to at least 180 degrees off the high. That ties to a price of 1903.

There hasn't been a 360-degree decline in price for some time. If the possible July 24/1991 square-out was significant, then it would not be out of hand to see a 360-degree decline -- even within the context of an ongoing bull market. A 360-degree decline ties to 1816 and the April low.

So there is some good symmetry pointing to the possibility that 1991 was an meaningful high.

Moreover, if the agenda is a giveback to 1816-ish, it is interesting that it would satisfy a long overdue test/undercut of the 200 dma.

This idea of a correction to 1816-ish is speculation at this point since the index hasn't even broken the 90-degree decrement down. But I wanted to walk through the process of arriving at potential projections. In this case, the pattern of a large rising wedge indicates that a 360-degree 'whoosh' may be on the clock.

Conclusion. The idea of an inflection point on this possible monthly square-out, coincident with the anniversary of the 1982 bear market low and the 3-year cycle waterfall low from August 8, 2011 may be crystallizing in other markets.

For example, TNX had the largest one-day gain to date this year on Wednesday.

Ten-year yields closed above their 50 dma yesterday and follow-through will confirm a breakout above a short-term declining channel.

The action looks meaningful in keeping with last week's 2.44% yield time/price square-out noted in this space.

In addition, the dollar is spiking.

Despite the spike in the dollar, gold is holding up.

If gold should continue to hold up in the face of a strongly advancing dollar, I can't help but think that it too will turn up with vigor.

The markets may be getting a whiff of the inflation genie. If the perception is that she is out of the bottle, it could be a game-changer.

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Twitter: @JeffCooperLive

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