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The Truth of the Tape


Market only wrong at very top and very bottom.


Editor's note: This is a free sample of Jeff Cooper's Daily Market Report. To learn more or get a FREE 14 day trial, click here.

All he believes are his eyes
And his eyes, they just tell him lies

-License To Kill (Dylan)

"Any fool can believe the truth; it takes a genius to believe a palpable lie."

The market is a genius. It's only wrong twice: At the very top and at the very bottom. Anybody can read the headlines and listen to the tube for the litany of the latest bad news: Layoffs, earnings downgrades, foreclosures, deficits, corruption. But Mr. Market, in his own inimitable way, is interested in only 3 things: The future, the future and the future. As much as the market may mimic the past, it is not concerned about the present other than in the most transitory of ways.

So the question is how can one read the market's tea leaves? How can one anticipate without becoming captive to a forecast? Most all indicators are descriptive rather than predicative. I am in the business of relying on the market's own behavior to reveal its agenda: the price action itself. Most all indicators are derived from price and volume so why not go right to the horse's mouth and consult with price itself. Price is the final arbiter. Of course, then there is the Time Factor. But right now we are talking about price.

The art of reading the market requires interpretation. As geometric as it may be and as much as it has its own internal clock, reading the market is an art, not a science. Interpretation requires a knowledge of the past behavior while good judgment derives from experience. The best way I know of interpreting the behavior of the market is through my method of Swing Chart Theory and the Wheel of Time and Price.

Swing Chart Theory marries time and price. Within every market there is a primary trend and a secondary trend. These are the market's X and Y chromosomes that operate concurrently spiraling like a double helix carving out the supply and demand of emotion embedded in the tealeaves of time.

The trend consists of wheels within wheels. The wheels of the 10 minute make the hourlies, the hourlies make the daily, the daily makes the short term trend, the short term trend makes the secondary trend and the secondary trend makes the primary trend.

While the primary trend may still be down until multiple indices recapture their respective November 4th peaks, there are signs of accumulation not the least of which have been the number of gainers as to losing days in the last three weeks and the breadth and volume statistics which reflect some powerful accumulation.

The inflection point came on November 26th which was a "90% up day". That session saw the S&P follow through to the upside after stabbing back up through the October lows after undercutting them in November. It is not happenstance that this week's consolidation in the S&P just below its 50 dma has seen multiple lows tested as the index backs and fills, holding at the highs of the November 26th high.

Previously I mentioned Swing Chart Theory. Basically, it is the study of the behavior of a stock or an index as the wheels of time turn. For example, on November 26th The Weekly Swing Chart turned back up. In bear trends when the swing chart turns back up, it typically defines a high quickly in terms of time and price.

Such was the case when the Weekly Swing Chart turned up in early November for the first time since the crash began in September. That turn up defined a high which led to a further plunge to new lows. There has been a change in behavior since the Weekly Swing Chart turned up on November 26th: the S&P is holding and extending gains.

Like a runner, the markets are a living breathing organism. They inhale and exhale. That is a good way to look at the behavior of the turn ups and turn downs in the various swing charts, be they daily, weekly, monthly, quarterly or yearly.

If the runner is still strong and has stamina within an uptrend for example, the inhale will supply the strength to push further ahead. If the runner inhales but falters, it is a sign of exhaustion and suggests lower prices. Gann used to say "key off the weekly charts to determine the trend for trading." You want to trade in the direction of the weekly trend.

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No positions in stocks mentioned.

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