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The Next 60 Days: The Bubble Before the Burst


Market could ratchet up new highs - before collapsing in midsummer.

Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a FREE 2-week trial, click here.

Hear me prowlin'
I'm gonna take you down
Hear me growlin'
Yeah, I've got flatted feet now

"Can't You Hear Me Knocking," The Rolling Stones

Yesterday, I mentioned that my work shows the potential for a severe downturn over the next 2 months.

Allow me to clarify. As long as 930 S&P isn't exceeded, that window remains open. Conversely, the cycles and patterns suggest that, in the event that 930 is exceeded, an expansive bubble-type move could play out into the end of this June/July period prior to a complete reversal.

The 60-year or 1949 cycle collapses into mid-June. With the S&P close to breaking levels -- levels which have held despite being tested (880-ish) for 3 weeks now -- any follow-through, (today or within the next 2 sessions) must be respected. Such a follow-through would suggest at least a full-blown correction down to a test of the Monthly Swing Pivot of 833. And with the 1949 cycle potentially operating, you never know if things could get out of hand.

Either way, there are cycles that involve the Fed on the horizon before the end of July. Suffice to say, Ron Paul is trying to get a bill passed that allows for an audit of the Fed. What would such an audit show?

It's interesting and dangerous that bonds collapsed along with stocks yesterday; lately, bonds have been buoyant when stocks sold off. The dollar tells the story, and it looks like assets denominated in US dollars are vulnerable. Even oil-related stocks were down; the commodity itself was up.

Is the idea of dollar devaluation/asset inflation about to implode?

I think there's a lot of blindness to and ignorance of potential danger, and the number of bulls at levels matching the October 2007 highs speaks volumes. Of course, the market marked time for the 49-day (7-squared) culmination count before heading off the cliff - in the same way that the market didn't find bottom until approximately 49 days from Obama's inauguration.

In other words, if 930 is exceeded, the timing for a downturn would be reset with the implication being that a bubble phase and spike towards a 1000 plays out first. The question right here is whether a flush out of the 50-day moving average occurs first if that leg toward 1000 is the agenda.

Conclusion: Yesterday stocks retreated across the board on a light volume decline. Of course, bulls will take heart from the idea that it was a light volume sell off although truth be told often markets roll over on their own weight and continue lower with volume expanding at/near the lows. Be that as it may, it is possible that much of the follow on selling after the initial gap down was a consequence of Spyder put buying for insurance. Since the Friday preceding a long weekend is seasonally bullish any weakness after an opening pop up must be respected.

Strategy: The S&P has broken a 3-point trend line and closed below the 20-day moving average for the first time since the March low. However, the 882 level held on the close which sets up the possibility of a move to gapfill near 899 today.

It could be quiet today -- a pause day -- after Thursday's expansion of volatility, with no side wanting to position further in front of the long weekend.
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No positions in stocks mentioned.

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