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Jeff Cooper: Gonzo Friday Will Overcome Thursday's Signal Reversal Day. Right?


Evidence is mounting that the market is about to change its bullish character.

The concept of order that has underpinned the modern era is in crisis.
-Henry Kissinger from a forthcoming book

Neither Putin the Peacemaker on Wednesday nor Draghi the Financial Pharmacist on Thursday could keep sellers at bay. When the market goes down on "good news", it pays to pay attention.

Thursday was an interesting day technically:

1) The S&P 500 (SPX) left a Key Reversal Day, setting an all-time high and closing below the prior day's low.

2) Wednesday, the index showed early strength and tailed off as it did on Thursday. Will the second mouse (reversal) get the cheese for the bears? Will we see downside follow-through on the important Friday weekly closing basis?

3) Thursday elicited the first close below the 10-day moving average since the SPX reclaimed it on August 11.

4) For three days in a row, 10 of the 15 NYSE's most active stocks have been down.

5) Divergent: it has been more than 100 days since the Russell 2000 (RUT) made a 52-week high, while the SPX set one on Thursday. The RUT left a large-range outside-down day on Wednesday from a new recovery high and followed through yesterday, as shown in this Russell 2000 ETF (IWM) chart.

The index is now flirting with a test of a Bowtie of its 50/20 day moving average with the 200 not far below. If the RUT should snap this trifecta of support especially on the Friday weekly closing basis, it should underscore the notion of a September to remember.

6) An hourly SPY shows a Soup Nazi sell signal on the opening spike high and subsequent knife back below Thursday's opening Topping Tail. So we have a possible test failure on the hourlies. Is it possible that this morning's jobs report will provide fun and games for a third test of the key 2009 SPX level?

The daily SPX for 2014 below shows three drives to a high in the late August/early September timeframe. As offered in this space, chasing spikes into this period is typically not a good idea.

The above chart shows that each of this year's three reactions played out following a marginal breakout -- a fakeout/breakout above a consolidation. This was the case prior to the reaction into the February low, the April low and the August low.

Clearly, the line in the sand is around 1990 which ties to the July pivot highs.

Despite a series of record highs this week, the SPX shows 3 consecutive red closes to kick off September. A 4th consecutive red close today would mark the first time this has occurred since December -- just before the largest break of this year. So I wouldn't stand on ceremony on a break of prior highs which fail to act as support. It may just lead to another buyable reaction. But odds are that following 3 drives to a high and a mini melt-up into the anniversary of the peaks prior to the 1987 and 1929 crashes, something more pernicious is in store.

Moreover, a rising wedge was snapped in July and this week's high shows what looks like a bearish backtest. Caution is warranted.

The SPX has violated its 50-day moving average 3 times this year. A 4th break would likely destroy a pattern of a 3rd higher low on the year (the August low).

A bull market can break back one stair step and still maintain its posture, but breaking two stair steps back typically leads to a stumble.

Breaking the 50 dma followed by trade below the August low would violate the second stair step back -- the March/April highs. A sign of the bear.

The 10-year yield may also be at an inflection point with a possible pattern of 3 drives to a low mirroring the 3 drives to a high on the SPX.

Some savvy players believe this is the beginning of the end of the bond rally, and also believe rising rates will be bullish for equities. But the question is how quickly will rates rise? With the 10-year contra to stocks in 2014, I would not be so sanguine as to what a breakout in TNX implies. And such a breakout, despite a couple of recent false attempts in the summer, is not as far away as one might think.

Conclusion. The market appears to be reacting to the significant time/price harmonics walked through in yesterday's report [subscription required]. A confirmed high in early September projects to a possible autumn panic which has been on the Daily Market Report's clock since July.

The landscape is littered with crippled bears crying wolf and bulls lathered up to buy every setback. That's typically when Blue Unicorns turn into Black Swans.

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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