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Jeff Cooper: Watch SPX 1947

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We could be on the verge of seeing fireworks in the equity markets.

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"The Fed is really holding the market up...the Fed turned this market around here because it let it be known that the Fed funds rate isn't going to be raised in March. I am concerned about the high yield market, I think that's in a major bubble, but nobody knows when it's gonna burst..."
-Carl Icahn.

Tuesday was the mother of all Gap & Go's -- apparently, courtesy of the ECB considering doing outright purchases of corporate bonds.

Just two things: they are considering doing so, and does considering such a measure imply dire straits?

When the SPX plowed through the key 1906 level we identified yesterday and continued up through the first hour, a trend day was signaled.

And bears capitulated, not wanting to see how high high was once the 200 dma was reclaimed.

As an hourly SPY shows, once the market knifed past a first hour level of potential resistance, it was magnetized to a declining trendline.



One good capitulation deserves another.

Interestingly, today is 180 degrees straight across and opposite 1946/1947 SPX.

Will today see a first hour high following a possible Pinocchio of the above hourly trendline?

If we see an early move above the trendline and then back below it, I think it sets up a nice shorting opportunity.

Just as there was a capitulation square-out at 1820/October 15, I can't help but think that another opposite capitulation may play out today around 1947.

An ORB (Opening Range Break) to the downside could set in motion a backtest of 1906 and a move to Gap Window.

Yesterday was the best gainer of the year. Remember that often the most vicious rallies occur within the context of a bear phase, just as the most vicious declines occur within the context of a bull phase.

Exactly what kind of beast we're dealing with here remains to be seen, but clearly it comes equipped with horns of volatility.

The hourly SPY chart shown above shows that yesterday satisfied a possible wave 4 corrective high.

Clearly, the power of decline into October 15 suggests it was a wave 3.

If this is correct, then a truncated wave 5 could be satisfied on a decline that holds a higher low at around 1843-1862 cash. Alternatively, last week's lows could be undercut on an orthodox wave 5.

Be that as it may, if the market is exhausted here and turns back down and offsets yesterday's gap, nose-diving back below 1906/1900, it is conspicuously bearish...at least for the short term.

As you know, 1906 ties to 180 degrees up from last week's 1820 low. Tuesday's Gap & Go indicated at least another 90 degree decrement higher, which ties to 1950.

That's within a whisker of our possible 1947/October 22 time/price square-out.

On this daily SPX chart, note the trendline (red) connecting the April and August lows ties to this 1950 level.



While the SPX has recaptured its 200 day moving average, I'll consider a move back below that holds below the 200 a sign of the bear.

The square of 9 is based on measuring the market logarithmically using the principle of square roots.

Checking a weekly logarithmic SPX from 2009 shows that last week the index broke a trendline up from 2009 for the first time.


Click to enlarge

The trendline was quickly recovered, paving the possibility of a false undercut and leg up to new highs. Breaking back below this trendline is cause for concern and demands defense.

There is another previously broken trendline (red) on the above chart which could theoretically be backtested. If the SPX vaults over 1950 and holds, it could indicate a nominal new high

Conclusion. Did mid-October mark another momentus October low?

In addition to the 1820/October 15 square-out, last week's low was 180 degrees in time from the April low at 1815. So a possible major double-bottom exists which could perpetuate new highs.

Never say never.

Yesterday was a Follow-Through Day so offsetting yesterday's range is a sign of the bear. While the SPX reclaimed the 200 dma, losing it again in short order sounds the alarm. And although it may seem far-fetched given this months volatility, it's possible.

Finally, despite yesterday's action, I would be remiss if I did not remind ourselves that the Gann Panic Window is still open to around November 11/12. Remember, as W.D. Gann stated, time is more important than price. The Fed may be able to monkey with price, but it can't fight time.

The Fed strapped on its Depends last week and oiled up the jawbone because the swiftness of the recent decline undercut their theme of levering up valuations until fundamentals catch up. So far, time has been working for them.

I am also reminded that the best DJIA point gainer (up until that time) occurred a week or so before the crash in 1987 -- so never say never.

One of the lynchpins that snapped in October 1987 was disintermediation in the currency markets. Recently, as a buddy of mine likes to say, we've seen currency markets trade like social media stocks -- not a good thing in an über-leveraged financial system.



The dollar shows two large signal reversal patterns/days.

Theoretically, a third drive to the 50 dma should define a pullback low.

If not, expect some fireworks.

Twitter: @JeffCooperLive

Get Jeff's commentary plus day & swing trading ideas each day with a FREE 14 day trial to Jeff Cooper's Daily Market Report.
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No positions in stocks mentioned.

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