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Jeff Cooper: The Emperor's New Kimono


The October rally was staggering -- but it may not last.

Rosalyn Rosenfeld: You told me that you wanted me to find a nice, quiet man. He's the one.
Irving Rosenfeld: Oh, what a doozy you picked. Oh, you hit that... He's the most dangerous guy ever.

-American Hustle

Market participants had been looking for a nice, quiet 10% correction for some time.

What we got was a doozy -- nothing short of a mafia hit. The market got whacked... but then it came right back.

If October's dramatic rebound from a waterfall decline doesn't create 'true believers' in those who worship at the shrine of buy the dip -- nothing will.

Stocks danced higher in the last two weeks of October, mesmerized like lemmings in a capitalist conga line convinced of God knows what -- that there will never be another bear market?

On Friday, there was a euphoric whiff in the air that 'the bulls can never be wrong again'.

After such a persistent rebound off October 15 lows that saw 12 days of higher lows (in other words, not one session saw trade below a prior day's low), could Friday's strong upside gap to prior all-time highs mark an exhaustion gap and climatic buying? Possibly, in the short-term, with November 3 aligning with 2028 SPX. But momentum suggests the potential for higher prices whether or not a shallow pullback plays out first.

To wit, 2070 is 90 degrees square the end of this week should the index blow off.

Perhaps the 12 day explosion higher in stocks was a matter of Church Lady Game Theory where gamesmanship among funds into October 31 and jet fuel injected prior to mid-term elections combined to rocket the market back to prior highs.

Perhaps the JCB gave a wink and a nod to those in the loop in the past two weeks that a Kuroda overture would be forthcoming right on the heels of the Fed shuttering QE.

The Fed was going to end QE come hell or high water. We got both in October -- hell and high water.

So the Fed ends QE and the JCB infuses massively. Just Central Bank coincidence? Is it possible the JCB the Fed's handmaiden?

In politics, nothing happens by accident. If it happens, you can bet it was planned that way.
-Franklin D. Roosevelt

And it seems to me that lately, politics has the financial bull by the horns.

You have to ask yourself who did the selloff benefit and who did the comeback benefit?

The answer may be one in the same. It certainly seems that the SPX was hammered low enough to break a large-rising wedge pattern with authority before ripping right back to the topside.

We can't say the fundamentals swung like a pendulum to the tune of a 400 SPX point range inside of 7 weeks?

Perhaps the sell signal on the break of the ascending wedge in the SPX in October is a case of 'the first mouse gets the squeeze while the second mouse gets the cheese'?

The break of a lower swing low (August) suggests an immediate swing high may be suspect.

Be that as it may, Friday's celebration seemed to drown out those questioning an all-out bullish response to what seems fear of further deflation on the part of the JCB.

How far in is an 'all in' in the Land of the Rising Sun?

Once again, the power of the Square of 9 proved itself: the October 15 time/price square-out turned out to be a doozy.

In other words October 15 and 1820 are 90 degrees square each other.

I underestimated the nature of the square-out but who knew it would turn out to be one of the greatest market rockets of all time?

Whether it turns to be a bottle rocket is anyone's guess at this point.

As offered above, Monday squares out with 2027 and the end of this week ties to a price of 2070.

As offered in Friday's morning report, successful bull market extensions typically consolidate/pause somewhat below old highs before knifing through to sustained new highs.

For all intents and purposes, this move has run up to immediately attack prior highs and it would be surprising if this were part of a long-lasting move, unless history fails to rhyme whatsoever.

Despite the unchartered financial terrain we're in courtesy of the Great Central Bank Experiment, technical tools work.

Mr. Market has a great tailor, flying by the seat of his pants but hitting his marks with precision seamlessness.

The best tools I know of for determining trend and turning points, the Square of 9 and the behavior of the wheels of time, were pointing higher the last two weeks. That said, a pullback from the 1947 level toward 1900 looked like it would play out and it failed to do so.

Let's take a look at a daily SPX from July.

The break below the August low turned the Quarterly Swing Chart down.

Typically, when a big wheel of time such as the quarterly turns, there is a reflex reaction in the opposite direction within 3 days.

Markets often play out in 3's.

Note the 3 day flush following the turn down in the quarterlies into the October 15 low.

At the October 15 1820 low, time and price squared out as 1820 is 90 degrees square October 15.

The important thing to understand is that when the SPX reclaimed the Quarterly Swing Pivot -- the level where the quarterlies turned down on trade below the August low, it put the index back  in a stronger position.

Notably, reclaiming that 1904 level coincided with the 200 dma and occurred on a gap. The large momentum on that day, October 21 meant that the market was talking -- especially as the SPX recaptured 50% of the prior decline on the session.

In my experience, I have seen traders lose more money shorting 50%+ retracements after large declines than in any other strategy. The issue is that the momentum of a large decline often suggests a kickoff of lower prices, but it may be a flush out in a continuing uptrend, or at least a test of highs.

This is why the concept of 'Time Tells Trend' is important: recapturing the Quarterly Swing Pivot on October 21 suggested something else was playing out.

However, few if any of even the most bullish surmised that it meant a line drive move to the all-time high without trade below a prior day's low.

Now let's look at the behavior on October 1 when the SPX offset the Monthly Swing Pivot by turning the Monthly Swing Chart down on trade below 1964.04, the September low. The index recaptured/offset 1964.04 with authority on 10/28/14.

This coincided with a gap above the 50 dma like the gap above the 200 dma and the Quarterly Swing Pivot.

The price behavior on the 'time markers' indicated a push to fresh highs.

October's snapback of 200 SPX points in 2 weeks looks unprecedented but feels familiar. In fact, the run into the major late March 2000 top was roughly 200 points in 2 weeks.

That doesn't mean this has to be a top. But caution is warranted since euphoria is thick in the air with the belief that a new leg highyer has begun.

Instead, the SPX may be carving out a 5 point Megaphone top.

Interestingly, this week the SPX will be 2070 days from the March '09 low. Above we noted that 2070 is 90 degrees square the end of this week for a possible double square-out if we get there.

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Twitter: @JeffCooperLive

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