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Full Speed Ahead?


Either market leaders are telegraphing that the market is going to make a marginal new high this week, or it is going decisively higher...


You are such a fool, to worry like you do
Oh, I know it's tough
And you can never get enough
Of what you don't really need now
-Stuck In A Moment (U2)

Citibank and UBS write off billions. Let's buy stocks. Better yet, let's initiate buy programs and buy baskets of stocks. Better yet, let's kick-start the new quarter with massive buy programs.

Of course, what are the usual suspects and the handles on basket programs? Google (GOOG) and Goldman Sachs (GS), both of which exploded in large range breakouts on Monday, sending Boo an early Halloween scare.

But let's buy stocks. Never mind the selectivity of the advance and the lack of volume.

Either leaders such as Google and newly reincarnated Goldman Sachs are telegraphing that the market is going to make a marginal new high this week or that the market is going decisively higher.

In my view we should have our answer this week. Friday's economic data looms large. It will be interesting to see how brazen Hoofy is Wednesday afternoon and Thursday ahead of the release of the job numbers on Friday.

Yesterday I showed the analog of the 1932–1937 pattern to the current picture. Now let's take a look at the measured move in the 2002 to the 2007 pattern.

Was the recent July high and the seizure in the credit market just happenstance? Have the issues that sent stocks tumbling this summer filtered into and out of the economy already? Or, counter-intuitively, is the S&P testing its July high here in early October in much the same way as the July 2002 low was tested in early October 2002?

Markets tend to balance out and seek equilibrium. A monthly chart of the S&P below shows that from the October 2002 low of 768.65, the index advanced 394 points to 1163 before consolidating. A measured move of another 394 points added to 1163 equates to 1557. The recent July high was 1556.

Click here to enlarge.

A) July 2002 low 775.70 and B) October 2002 low 768.65
From B to C = 394 points. C + 394 points = 1557 D) July high 1556.

It is important to note that the October 2002 low undercut the July 2002 low by a marginal seven points. Consequently, a rush to judgment here that a new leg is beginning if the July high should be exceeded may prove to be a faulty risk to judgment.

That's what makes the call so difficult: We are in the timeframe for a test of the July high based on both time and price considerations. However, given the symmetry and the current position of the market, my judgment is that either the S&P should not go much higher than the July high unless the message of the market is that it is going substantially higher.

In that sense the strategy here actually becomes rather clear: either the market is very close to a high or it is going much higher, right here right now. Importantly, as occurred in July, if the market fails to follow-through and offsets Monday's "breakout, it may prove to be a fractal of the crystal clear "breakout" on July 12 this year.

Clearly, the S&P appears to be in a strong position, having captured the 1529 low of the July 20 sell signal bar as well as the 1540 level of the June 1st high.

At the same time, another failed breakout and test failure here should define a top in October in a year ending in seven.

With the average stock not following the DJIA's move and the Dow Transportation Index failing to confirm the action in the DJIA, we have to be defensive no matter how frenzied Monday's price action. While the above divergences are typical of market tops, it is important to remember that divergences can confound and persist for a while. Be that as it may, if these divergences sink into a reversal, the hunt for Red October may be on.

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.

No positions in stocks mentioned.

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