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Jeff Cooper: A Wealth of Notions


The charts indicate that the S&P 500 is at a crossroads precisely when underperforming bears are ready to reverse course.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
-Adam Smith

Yesterday near the open we sent the following note [subscription required] to members:

The Dow Jones Industrial Average (INDEXDJX:.DJI) closed at a new high yesterday, unconfirmed by other indices, along with a LARGE negative breadth divergence reflected by the McClellan Oscillators.

This leaves a potentially powerful sell signal occurring in the seventh month of the year, on the seventh anniversary of the 2007 primary high which was seven years from the 2000 high. Additionally, we are seven months from the important January high.

The non-confirmation/sell signal is being greeted with a Breakaway Gap this morning.

A close below 1950 on the S&P 500 (INDEXSP:.INX) should confirm a downtrend.

As W.D. Gann said, seven is the number of completion.

There have been a multitude of notions suggesting our July turning point would exert downside pressure.

Today was "two weeks on the side" -- another W.D. Gann expression indicative of a distribution or accumulation phase prior to an impulse.

These notions include:

1) A turn in early July, which is 90 degrees from the early April peak and 180 degrees from the January peak. 
2) A weekly Megaphone Top formation [subscription required] in the Russell 2000 (INDEXRUSSELL:RUT).
3) Multiple sell signals [subscription required] on the NASDAQ 100 (INDEXNASDAQ:NDX) on Tuesday, a Key Reversal Day featuring a Soup Nazi sell signal.

Thursday's opening spike low in the SPX perpetuated a squeeze to the flat line but was followed by an ORB (Opening Range Break) -- a break below the first 30 minutes' range. A subsequent backtest of the ORB setup was a solid risk to reward short.

When a test of session lows failed prior to the runoff, the index accelerated lower into the bell.

The SPX was magnetized to 1958 with Thursday being 1959 calendar days from the 3/6/09 bear market low.

A bullseye for the bulls?

Anything is possible, but as you may recall, the recent prior swing low last week at 1952 tied to 1952 calendar days from the 3/6/09 low.

The market 'respected' that time/price harmonic but the rally only lasted a few days. If that were a major inflection point/harmonic, I think it should have generated new highs in the SPX. Moreover, after the close, the futures followed through to the downside, threatening to snap this angle on the important Friday weekly closing basis.

The bearish case is that the 'second mouse gets the cheese', meaning the second break of this time/price angle will be a sign of at least an intermediate change in trend.

Thursday's close also broke the lower rail of a rising channel from June. Notably, last week's low saw a little undercut of the channel. And now, a second move may prove to be the real deal, precipitating a leg lower.

Thursday's angle of attack below the SPX' 20-day moving average sets up a possible Gonzo Friday and a flush-out to the 50-day moving average on downside follow-through, especially with the index level sitting on the cusp of the number of days from the 2009 low.

Additionally, 1949 is 90 degrees square July 17/18 on the Square of 9 Chart. The futures plunged to 1949 Thursday after the bell. A Friday close below 1959 and 1949 indicates a change in trend of more than just a minor degree.

Take a look at a weekly SPX chart from the 2009 low.

Clearly, the burden of proof is on the bulls here.

Above, we noted that seven ties to a turning point in July. Interestingly, the SPX has carved out seven hits at weekly resistance.

Since the market has shrugged off everything that could have sparked a logical and meaningful correction for almost two years, players may be complacent about the inherent nature of risk.

I was surprised to hear about many underperforming players owning too much cash and waiting too long for a pullback actually interested in buying right here, right off the highs. I can't help but wonder how many market participants aren in the same boat -- buying at exactly the wrong time.

Conclusion. Why would money managers harvest gains here when buying every dip has been well-rewarded?

If there is a change in character and they sense a catalyst looming over the balance of the year, they could lighten up "in regard to their own interest," as offered in the quote above from Adam Smith.

The action in Sandisk (NASDAQ:SNDK) on Thursday is an example of how the notion of realizing gains in glamours may hit home.

It's a market of stocks.

The more leaders like SNDK succumb, the more vulnerable the market may be to an air pocket.

At least once in every century there has been an episode of great wealth destruction when the Four Horsemen of the Apocalypse -- Pestilence, War, Famine, Death -- have ridden rough-shod. World War II was the last time that the pale horse with Death on his back and Hell following him terrorized the world. How do you preserve wealth in times when the Four Horsemen are on the loose? We know from history that equities are wealth enhancers in good times, but do stocks work as true wealth preservers when their country, their "home" society, is facing defeat and occupation from a foreign power? If they don't, what should a person with wealth do? How well in real-inflation adjusted, purchasing power terms, do public equities perform?"
-Barton Biggs, Wealth, War & Wisdom

This is a question that may be on more than a few lips this weekend with the start of World War II being a cyclical 900 months (plus or minus one month) ago.

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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