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Mr. Market Dials M for Momentum


What was the catalyst for this rally?

Editor's Note: This is a free edition of Jeff Cooper's Daily Market Report. To receive a 14-day FREE Trial of Jeff's insights twice daily, click here.

I've got no self control
Been living like a mole now
Going down, excavation
High and high in the sky
You make me feel like I can fly
So high

-Elevation (U2)

The soft overcomes the hard
The slow overcomes the fast

-Tao Ching

When the market turns, it turns like a school of fish - all at once. As traders, it's hard for us to take off our trading cap and replace it with a swing hat. But, when time is up on a particular leg, this is the correct posture and attire to adopt.

It's worth reviewing the conclusion section of Tuesday morning's report, for me as much as for you:

"The important thing to consider when dealing with these cycles and liquidation is that the market is in a vacuum and can go vertical once the selling dries up--and when 'time is up.' When a significant low is in the market typically does not accommodate by pulling back to let the Street in at 'comfortable' prices once they have identified a low--once a low has been confirmed. There will be a change in character from the backing and filling which will stick out like a sore flag and a red thumb. Typically at that point you must recognize that the market is not going to retest.

"It may retest months out--but on a trading basis the train is leaving the station at that point and when it does you must buy at the market. While the correct posture has been to pace limit bids as every time you chased the market it proved the wrong thing to do, there will come a time where the old rules must bend to buying at the market when strength appears. Naturally you must use a stop. But, the pullback wont' come and when it does come it will be the pullback that retraces the entire move. You have all seen this on various time frames. When and if a turning point comes I would expect the DJIA to rally 1000 points within a week or so. "

As you know, the market tends to move off the 90 degree or square harmonics of 90 degrees of the 360 degree year. 90 is important on all time frames. For example, earlier in the week I noted that this week was the 90 months or 7 ½ year anniversary of 9/11/2001. The market declined sharply and then the DJIA rallied 1000 points within a week. From Monday's low the DJIA was up 730 points in three days.

The Weekly Swing Chart turned up on Wednesday gave a very quick short lived reflex pullback into Thursday morning. When the S&P exceeded the level of last weeks high (where the weekly swing chart turned up) it gave a bullish signal indicating an extension higher to our projected first resistance at 746 (270 degrees up from low). Our idealized pullback for Thursday morning stopped shy at 714 which was a test of Wednesday's lows.

Click to enlarge

The S&P closed nicely over 746 at 750.75 which opens up the alternative for an immediate move of 360 degrees up from low or 774. This level coincides with 50% of the swing from the February 9th high of 875 to the 667 low.

A Friday high close for a reversal week may be to enticing for the bulls to let go. And, if the averages can get through the first hour, that may be the agenda. Be that as it may, from one of these levels near 744 or 774 the first sharp break should come.

Conclusion: Typically the first move up off the low to the 20 DMA finds resistance. Last night the S&P closed just above its 20 DMA.

Click to enlarge

However, the market was so compressed that it may not react here. The market broke out again and closed near resistance, but yesterday was the Thursday the week before the rollout of the new front month for the S&P futures - and a lot of short baskets may be trapped.

The shorts may be on the ropes - as I offered in Wednesday's report, "I would NOT fade the strength and get cute."
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No positions in stocks mentioned.

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