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Jeff Cooper: Church Lady Game Theory


Mr. Market dressed up as a bungee for Halloween.

On Tuesday, the S&P 500 (SPX) drove through its 50 day moving average the same way it exploded through the 200 last week -- like it didn't exist.

What can I say?

Mr. Market dressed up as a bungee for Halloween.

Surely, the 160 point SPX ramp up in just days in front of mid-term elections is pure happenstance.

Isn't that special?

Obviously, it has nothing to do with the game theory strategy I described a few days ago whereby a big fund punishes its competition by pushing the market around to enhance performance in front of the October 31 fiscal year-end.

These things don't really happen, do they?

Yesterday was settlement day for October 31. If it is true that window dressing is frowned upon by the authorities that so well scrutinize the artist formerly known as the free market, then perhaps yesterday represented at least a short-term buying climax.

Nothing has changed in the last week, other than the price of stocks.

After a persistent escalator up for years, the plunge following a break of a long rising wedge sounded an alarm. Those who heeded that alarm bell are being punished for their discretion, at least in the short run. But the size of the 'V' up off a picture perfect 10% decline in such a short period is a marvel.

Mission accomplished? If this move doesn't simply serve to foster a banana split personality of complacency with a buy-the-dip cherry on top, nothing will.

That said, as shown recently, the current pattern shows a remarkable resemblance to the sharp shakeout in the summer of 2007 prior to a nominal new high which preceded an historic downturn.

As the daily SPX from this year above reflects, a slightly higher high in the index will leave a possible four-month, 5-point Megaphone Top (potentially bearish).

Importantly, today is 90 degrees square a price of 1987 -- in a market that hasn't taken a breath off the 1820 low of just 9 days ago.

Caveat Emptor.

Conclusion. Monday's N/R 7 Day telegraphed an explosion -- one way or the other. It was up. The futures telegraphed the buy program overnight. Now the question is whether the program will be unwound on an FOMC Cha Cha Day today which sees a reversal of yesterday's rip.

Would a quick backtest of the 50 dma seem so out of hand?

Strategy. While it's difficult to glean too much from technical analysis in an environment that looks contrived, there were markers along the way that indicated higher prices.

The strong action following turn ups of the 3 Day Chart on 10/20 and the Weekly Swing Chart on 10/21 pointed to rallies.

However, now the SPX is in the weekly Minus One/Plus Two sell position. If the index holds up here, Monday could see the important 3 Week Chart turn up with 3 consecutive higher weekly highs. If this plays out, it will be interesting if it occurs at new highs which are only two days away from days like Tuesday's.

The behavior from the weekly Minus One/Plus Two position or a turn up of the 3 Week Chart should tell us a good deal about the real trend.

Form Reading Section

Twitter: @JeffCooperLive

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No positions in stocks mentioned.

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