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Power vs. Force in the Market


At the heart of volatility is the absence of liquidity. Lack of confidence is the soul of the lack of liquidity.

"I like it... I'm not gonna crack
I miss you... I'm not gonna crack
I love you... I'm not gonna crack
I killed you... I'm not gonna crack..."
Lithium (Nirvana)

The famous economist John Maynard Keynes said, " When you get new information, a rational man is willing to change his mind."

What is a trader to do with the greatest volatility in 50 years? What is a trader to conclude when there is little follow through from one week to the next?

At the heart of volatility is the absence of liquidity. Lack of confidence is the soul of the lack of liquidity.

The more the market is 'messed' with at the margins, the less confidence there is in the 'free market place', a level playing field and the bastion of capitalism. Power versus force.

The markets instill a respect for irony: who woulda thunk, fifteen years ago that, Moscow would be be most expensive city on earth or that China would be the poster child for a brave new world of consumerism?

Reversion to a human mean?

It seems to me that the market is neither in an uptrend or downtrend at the moment but in an indecision mode: has the S&P been in a bear market rally and destined to, at the very best, test its August low? History would argue yes. But you never know.

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It seems to me that after years of a dampening of volatility and a persistent advance from March 2003 to July 2007, that there is a better than average likelihood that the trend will be volatility.

I would expect the market to be a roller coaster for at least six to nine months counting from the July peak. To quote Betty Davis, "better buckle up". By the end of this season in hell, there will be few steady hands able to apply lipstick to this pig.

How does this porkchop hang in there against all the bad news and knives falling in the credit markets?

We should get a good look at power versus force this week. Why? The bulls will pull every trick in the book to make the great expectations of gaming the Fed look bullish, however, at the same time there should be plenty of bulls willing to break rank and sell into any theoretical spike of two to three days to above 1500 S&P that turns the monthly swing chart up---especially in front of what may be a going out of business sale by many hedge funds at the end of September. At the same time the Fed can not tolerate to see a 3% down day if they cut. Power versus Force.

Click here to enlarge.

Be that as it may, the market as a discounting mechanism may have in fact baked in a cut in rates and Tuesday could play out as a classic sell on the news.

The assumption is, hypothetically, that Friday's expiration will be bullish, but there are many go-to stocks that look like they are tracing out distribution an drifting under the veil of buy programs in the S&P. Only a break of 1478 will send a short term sell signal, while a break of meaningful support at1470 should be a significant signal.

Click here to enlarge.

My advice: wait until you see the whites of their eyes, even though the market's peepers appear bloodshot: stocks should be poised for a big leg down to below the August low after the market on close buy programs on Fed Tuesday. The question is, if the market buckles after the perceived good news from a rate cut, what does the Fed do for an encore?

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.
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No positions in stocks mentioned.

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