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A Sea Change In The Market

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Technically speaking, Thursday represents a definitive change in character, if not a change in trend as yet.

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What's the market talking about?

If the market trades on fundamentals it must be setting land speed records for metamorphosis: from the Goldilocks Butterfly to the Credit Caterpillar crawling over speculative psychology. Do things change so much overnight to cause a 360-point drop in the DJIA based on Exxon Mobil (XOM) earnings and a Citigroup (C) downgrade? Was Thursday's shakedown the lost third "Cha" in the FOMC Cha-Cha-Cha Pattern?


Click here to enlarge.


As you know, typically volatility after an FOMC announcement, there are usually three distinct moves of increasing amplitude in opposite directions from the preceding swing, with the third move giving the genuine directional bias. Wednesday the market sold off initially after the Fed ease. Then, stocks rallied strongly while Thursday's decline eclipsed Wednesday's swings entirely.

Was Thursday's sell-off related to fiscal year end for many mutual funds that could "legally" sell, as mentioned yesterday in this space? Was Thursday just another shakeout like we saw on October 19? Will we get another case of Beach Blanket Equity Bingo that sees the market bounce right back like a ball underwater as we've come to expect so many times before?

Or did Thursday define a Sea Change in sentiment when it comes to a number of heretofore invincible one-way bottle rockets? For example, Crocs (CROX) closed at a new all time high on Wednesday, only to be decimated to the tune of 27 points on Thursday. It was just Monday that Las Vegas Sands (LVS) hit a record high of 148. Thursday after earnings the stock was trading at 106. Wynn Resorts (WYNN) scored an all-time high of 176 on Monday, but was offered at 142 after the close Thursday.

Recently on the Buzz and Banter, and in this space, I've mentioned WYNN as to the significance of the 50/100 Rule: when stocks run up 50 or 100% in a short period of time, they can turn on a dime.

Garmin (GRMN) is another name that the Street has fallen in love with, which hit an all-time high of 125 on Oct. 24. GRMN closed at par on Thursday.

CF Industries (CF) in the adored fertilizer sector stunk up the joint this week, gassing up 8 points on superb earnings of $96.00, but closed at $83.00 on Thursday.

Deckers (DECK) climbed up over 30 points to 147 this week on the back of earnings, but settled below 133 on Thursday.

When Tapetown is so turbulent a few old saws rise to the surface:

  • The market turns on a dime, most traders cannot.
  • It is the reaction to the news, and not the news itself, that tells the tale of the tape.

These may seem like clichés, but clichés are so called because so many times they are true. The difficulty in any particular situation is knowing whether or not news and fundamentals have been baked into the cake – whether good news will be bought or sold – whether the buy the rumor and sell the fact trade will rule the day; or whether the momentum freaks and quant cowboys will drive good news even higher, or bad news even lower.

Just as volatility is a gift from the gods for traders to pay the rent, momentum is a beautiful thing for a trader. Almost as beautiful as is hindsight. In hindsight, almost everything about the prior session seems so crystal clear.

It seems crystal clear to me that the market is evincing a sea change. With the Fed having pulled the net of last resort for the time being, and Ben having put the put back in his hip pocket, we need to be very precise about grabbing the trapeze when it comes to buying into downswings. Why? Because for the near future at least, good news will be good and bad news will be bad. The bulls may not charge in so ferociously to scoop up the babies thrown out with the bathwater, or to catch falling daggers between their teeth. The action recently in some of the glamors may be telegraphing this change in character.

Technically speaking, Thursday represents a definitive change in character, if not a change in trend as yet.

  • The S&P sold off after the third easing by the Fed.
  • The S&P was repelled after tagging the low of the high day bar (Oct 11th) on Wednesday.
  • The S&P collapsed below the mid-point of October's range at 1533, and in so doing careened to a close below its 50 DMA. This is its first close below this key moving average since Boom-Boom Tuesday on September 18.

A "bad jobs number" on Friday could be catalyst for follow-through. Follow-through from here could trigger a cascade set-up lower, because:

  • A break of the 1490/1500 level would violate the pivot of the year.

    Click here to enlarge.


  • This level equates to the June lows, which when broken, saw the market waterfall. 1500 was the early August high and early September high.
    Click here to enlarge.


  • A break of 1490 suggests a test of the mid point of the year, which is approximately 1474 S&P, which coincides with the low prior to Boom-Boom Tuesday.

  • At the same time the 200 dma is at 1482. A break of the 200 dma puts the market in a weak position.

  • Most importantly, a break of the October lows of 1489.55 will leave an outside down week and turn the Monthly Swing Chart down at the same time.

  • If the S&P accelerates through all these pivotal support levels, downside momentum could explode as portfolio managers scurry to save their year.

This doesn't mean a meltdown will occur. But we're certainly not getting a meltup as some thought on Wednesday night. However it is noteworthy that a Cascade Setup does exist here.

The fact that such a setup exists after the 1576 S&P Square was hit on the anniversary of some significant market highs and lows, and immediately after a new monthly closing high, (October) cannot be ignored. In addition, this setup is being carved out five months from the previously closing monthly high scored in May.


Click here to enlarge.


This pattern is analogous to the 2000 high and return rally failure five months later, and indicates that any follow-through from here could be a sign of the Bear.


Click here to enlarge.

A close below 1490 would imply that Hoofy has left the building.


Beginning Tuesday, November 6th, Jeff Cooper's daily column will be moving exclusively to his subscription service, Jeff Cooper's Daily Market Report. With his service, you will also receive daily swing and day trading setups as well as follow-ups from Jeff.

With any questions, or to sign up and make sure you don't miss a column,
email Josh Sander or call 212-991-9357.

No positions in stocks mentioned.

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