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Jeff Cooper: The Song Remains the Same... Until It Doesn't


It's the singer, not the song.

Editor's Note: To watch a replay of Jeff's recent webinar The Jeff Cooper Blueprint: 5 Trading Setups That Just Plain Work, click here.

Currently, it appears the vast majority of market players believe in a different reality where debt is irrelevant.

Apparently, the Rolling Stones had it right when they sang, "It's the singer, not the song."

Right now the singers are the central banks. The song is the cycle which, in my opinion, sooner or later will be heard.

For the moment the allure of the singers is overwhelming psychology much like the lure of the Sirens shipwrecked ancient sailors.
The song of the last few years remains the same with fundamental hedgies that load up and place thousands of trades monthly, both long and short,  convinced they are irrevocably backstopped by the Fed. I can't help but wonder if they are setup for another bust like that from 2000 to 2003 and 2007 to 2009.

Some market participants recognize the danger. It's not as if those navigating financial tides and turbulence are tone deaf---I suspect many are simply playing the game because they are forced to do so or lose money under management. This is what the Fed has been counting on to buy time after the Great Debacle Of '08.

Those that see the risk of hitting the rocks, think they can veer to safety in time and avert catastrophe (isn't it always that way?) Others see nothing but smooth sailing (isn't it always that way?)

This is what persistent trends do to psychology and logical thinking---especially when the trend is underpinned by an outside force.

However, as Buddha said, "The problem is we think we have time."

We always think we have time the longer something goes.

The trust in the Fed and the world reserve currency speaks to the illusion in misplaced investor sentiment. Since the Fed was established 101 years ago with a mandate for stability in price and to prevent panics, the dollar has lost more than 90% of its value and panic has become the great American financial past time.

Interestingly, on the Square of 9, 101 is square the month of November. In the fullness of time, it may be seen that this November was a pivotal time for the Fed.

Even the rest of the world has rushed into the dollar in recent months. But it's not because of the strength in our economy. It's not because of something good; it's out of fear. The presumption is the dollar is a flight to safety.

As the saying goes, the dollar is the least dirty shirt in the currency laundry. It seems to me this is as viable an investment strategy as betting on pigs flying.

The risk is that at some point all the money that has surged into the financial system will flood into the economy and there will be hyperinflation. The key phase is 'at some point'. No one knows exactly when that day of reckoning is. We may get deflation first.
In the meantime, stocks fly up on the back of currency debasement and buybacks.

Since the crash in 1987 when Greenspan rode to the rescue, the belief in the Fed has trumped all--- including the expectation that elected representatives to the branches of government will do their job. The Fed fixes all. The fix is in. But the consequences may not be.

"Among the worst consequences of the delegation of responsibility from political leaders to central bankers has been the increasing arrogance of the latter group and their inability to understand the rapidly evolving nature of the world's major financial institutions. Prior to the crisis, central bankers were unable to understand the risks that were building up in the global financial system and the economy. They did not see the 2008 collapse coming, nor did they perceive how fragile the system had become, or that the major financial institutions had become the largest and most leveraged hedge funds on earth." Paul Singer

Just as "In Fed We Trust" has seemingly replaced "In God We Trust" on our dollar bill, so too it is remarkable that the most hated stocks today are the junior miners. GDXJ is down from a high of 156.13 in April 2011.  We are 44 months from high. 44 ties to the end of October on the Square of 9 Chart. 156 is 90 degrees square this week. Note that the miners peaked 6 months before gold. They could lead again if they are bottoming.

Because the sentiment in the miners is the uglier than when gold made a low at the end of the 1990's, because there is a wave count in gold that suggests a bottom of some significance, and because almost every miner out there registered a selling climax in the last week, the miners are on the long radar.
Selling climaxes occur when a stock makes a 12 month low, but then closes the week with a gain. Four months later stocks registering selling climaxes are nicely higher.

As the chart below shows, gold has carved out a triangle following an upthrust. Yesterday saw an N/R 7 Day (the narrowest range in 7 days). Typically these contractions in range are followed by an expansion in range in the following day or so. It looks like a big move is coming in gold.

Click to enlarge

The BoJ and the Fed have been doing their best to promote inflation. After more than 5 years of zero interest rates in the U.S. and decades in Japan, it has been impossible to do so. So nearly everyone believes it is virtually impossible to do so in the near future.
I can't get out of my head, "be careful what you ask for."

My take on the tape: The SPX has traded at our important 2039 level for 4 days. To recap, 2039 vibrates off the big October 15th low. 360 degrees in price up from the 1820 October low is 1995. It is not unusual for momentum moves to have a 90 degree overthrow from a 360 degree move. 2039 represents 360 degrees plus 90 degrees up from the 1820 low. Consequently, trade with authority back below 1995 puts the SPX in a vulnerable position. This ties to a move back below the prior September swing highs. Remember that the October waterfall played out following a break below the prior July highs. Prior resistance that fails to act as support often sees sharp sell-offs.

Click to enlarge

At the same time that the SPX has theoretically climbed to the top of the next peak of the roller coaster, the RUT traced out what looks like bearish Train Tracks on Wednesday and Thursday.

In fact, the RUT left an outside down day on Thursday. The presumption is a decline that backtests the recent breakout to around 1160. This would tie to gapfill as well.

Additionally, glamours like Gilead Sciences (GILD) appear to be breaking down. GILD left a Gilligan sell signal on October 31st and broke meaningfully below its 50 dma on Thursday. When the generals like GILD turn tail, the troops are usually not far behind.

Conclusion. None of the major international stock markets I've looked at have followed the U.S. popular indices to new highs---except for Japan's Nikkei Index. The Nikkei gains were perpetuated by their monetary devaluation.

So, this is a big bearish divergence for the U.S. market.

The flight of safety into the dollar has benefitted the SPX/DJIA for the moment. Can the U.S. market hold up with major international markets in trouble?

We may be witnessing a mirror image foldback with the U.S. market crashing up into the time frame of the meltdown into the 3rd week of November in 2008.

Form Reading

Twitter: @JeffCooperLive

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