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Intense Selling Ahead?


Cycles showed their hand yesterday.


Editor's Note: This is a free sample of Jeff Cooper's Daily Market Report. To receive this regularly, along with his day and swing trading setups, please click here for a free two week trial.

The option expiration hangover arrived and it was a doozie.

Of course, there's always a wrinkle: I expected an up gap opening that would find a high in the first hour. However, the market powered higher than I suspected and for somewhat longer. Nevertheless, the market is not a fine Swiss watch: You have to allow for price and time to overshoot and undercut somewhat.

Be that as it may, the cycles that I saw hitting that could develop into intense selling by the second half of May appear to have shown their hand. Monday's liquidation looks like a first taste of that intensity.

The reversal by the S&P from a spike over its 200 dma and the double top, potential test failure pattern in the DJIA suggest a cautious stance until proven otherwise. A move back below my 1421 pivot (the prior double peaks in May) that holds confirms the correctness of a defensive posture. The bulls need to defend 1406 (the important low last November) or the S&P should find its way back toward a minimum of 1390ish.

The Weekly Swing Chart low is currently at 1386 so that looks like a viable projection if we see persistent downside follow through for this week.

Last week I mentioned the idea of an MA top on a spike above the twin peaks at 1421ish. That pattern (bearish) may have been satisfied with Monday's spike and reversal. If so a break of the 'feet' of the M in the vicinity of 1406 will confirm lower prices.

A look at the Square of 9 calculator, or the Wheel of Price and Time, shows that a price of 1439 is conjuct or a harmonic of May 16th. The S&P thrust to 1440 on the full moon on Monday indicates the notion of a climatic thrust and emotional capitulation. I know more than a few traders who were stampeded in by Monday's early strength, inferring an additional extension and that the 'breakout' above the 200 dma was a bullish sign.

Monday's sharp reversal from just as sharp an open trapped too many market participants to be done without at least two to three days hard down. A look at a chart of the behavior of Goldman Sachs (GS), for example, shows what a reversal from a Hook Sell over the 200 dma can lead to while players are assuming a bullish pullback is underway with the stock dripping persistently lower.

Conclusion: Many large range reversals in names such as Apple (AAPL), Research in Motion (RIMM), Cleveland-Cliffs (CLF) and DryShips (DRYS), to mention a few, as well as a 7th wave potential culmination move up on the daily chart of the S&P, suggest caution and that the most likely course is down over the ensuing days and likely for a minimum of a few weeks. I would not be in a rush to buy anything back to soon as Monday looked like the plug was pulled after a put/call dance left many participants without a chair when the music stopped.

Trading Lessons

Whiting Petroleum
(WLL) was a day pick for Monday. My job is to identify set-ups poised to extend higher and lower. Trading would be an easy task if stocks always triggered without flushing out players. The thing to remember is that often short-term traders who carry over a winning position from the prior session will bang out a stock on the open. Consequently there is typically a lot of volatility in the opening half-hour to hour, making it crucial to consider taking retriggers, i.e. when a set-up retriggers.

No positions in stocks mentioned.

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