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Navigating Through This Jungle


No matter how long you are strapped into your turret and suited up to play equity video, it's just plain hard not to react emotionally.

Welcome to the jungle, we got fun 'n' games
We got everything you want
Honey we know the names
We are the people that can find
Whatever you may need
If you got the money honey, we got your disease
Welcome To The Jungle (Guns N Roses)

The 90 (to 120)–day blow-off from the March low was a classic Run For The Roses. The scent of that American Beauty seems like a long time ago, doesn't it?

After the March 14 low, the S&P regained its 50 dma and declined briefly back below this key moving average. However, when the index once again recaptured its 50 dma in March, it was off to the races. The second mouse often gets the cheese.

Last week, the S&P briefly poked above its 50 dma only to falter. However, after Tuesday's rally the index is poised to attack its 50 dma once again. Will a successful conversion of the 50 dma confirm that August 16 was a significant low?

Anything in the market is possible of course, but despite Tuesday's broad rally volume was meager. And, unlike this past spring the prospects of a recession are real, as are the problems besetting the credit markets. But you can never underestimate market participants' propensity to whistle past the graveyard. The macro-view has mashed many a trader. Scenarios have seized unrealized gains of many embedded in the inflexibility of their own opinions.

And, there are lots of opinions bungling in the jungle for top honors these days. Many of these opinions are intriguing and inviting: all the more so because they are spun from the minds of some of the best and brightest.

Even some of the most time-tested pundits who were downright petrified on TV in mid-August were enamored of the lore higher after Tuesday's advance.

No matter how long you are strapped into your turret and suited up to play equity video, it's just plain hard not to react emotionally: when stocks are caving in they look like they are going to hell in a hand basket, and when they're running they look like they are going into orbit.

It's even harder to be objective when the market is more volatile than it has been in 50 years. Since its July peak the DJIA has advanced or declined triple digits every three to four days. Only a fool would presume to know how this thing is going to unfold as we move into the heart of this ensanguined season. Let's face it – it's a jungle out there. The only tools I know of that I feel comfortable relying on are time, price and pattern. And even they will stab you in the back if you don't adhere to a discipline mapped out ahead of time.

In trading, less is more. So let's look at an hourly chart of the S&P from its July peak to see what the price structure reflects.

Click here to enlarge.

The S&P has remained narrowly above a downtrending channel defined by solid lines. However, at the same time a rising channel defined by dashed lines shows that the S&P could rise to test 1500 a third time without necessarily turning the trend back up.

In fact, a rally that extends to 1504 would turn the Monthly Swing Chart back up. However this would coincide with a bearish 1-2-3- Swing Snapback. If the Monthly Swing Chart should turn back up on trade above its August high, it could well define a critical peak if the trend is down. The behavior on such a turn-up would be telling to say the least.

Finally, despite Tuesday's broad advance two key go-to names lagged. Both Goldman Sachs (GS) and Apple (AAPL) closed in the red on Tuesday.

Apple is the poster child for the bulls, but may have carved out a double top. Trade back below its 50 dma at 133.50 and then 130 should serve to confirm such a double top.

Click here to enlarge.

Meanwhile, Goldman has traced out a potentially bearish 1-2-3 Swing to a test of its 50 dma.

Click here to enlarge.

Wouldn't it be fittingly perverse of the market to send the "all clear and out of the woods" signal just as it has decoupled from the 1987 waterfall analog, and then pull the plug?

Welcome to the jungle.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.
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No positions in stocks mentioned.

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