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Is Recent Breakout the Real Deal?


If the breakout is genuine, it may be indicative of substantially higher prices.

Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and nightly day and swing trading picks, click here.

Going to the chapel of love
Spring is here….. Theeee
The sky is blue (whoa-oooo)
Birds all sing like they do
Today's the day
We'll say "I do"
-- "Going to the Chapel of Love" by The Ronettes

Yesterday I showed a weekly chart of the S&P from July 2007. I'm showing the chart again to further flesh out the big picture position of the market.

A trendline constructed from the orthodox July '07 tags the May '08 reprieve rally high, which was the swing high prior to the crash in '08. The trendline also tags the April 2010 high proving the geometry of these pivots.

Consequently the 64-billion-dollar question (hey, the Fed's been printing!) is whether the current advance to this trendline is a bearish backtest and Pinocchio of this dominant declining trendline or whether the recent breakout is the real deal.

If the breakout is genuine it may be indicative of substantially higher prices. A breakout over a three-point trendline leaves a Rule of Four Breakout Signal which often times indicates major moves.

Contrarily, the breakout may be a false overthrow, a fake-out breakout similar to the October 2007 peak. If so, as in October '07, the breakout will be short-lived and the measure of the market will be told on this week's bar or next week's bar.
I'm not an Elliottician but figure I may as well get my two cents in since there are so many possible interpretations of Elliott Wave Theory. The move down from October '07 clearly shows an impulsive five waves down. Five waves of impulse are considered characteristic of the primary trend as opposed to a corrective trend.

The problem in determining the current big picture trend is that an impulsive five waves up from March '09 can clearly be defined as well. In theory, the five waves down into March '09 culminated a big Wave 1 down implying that after a countertrend rally, a new bear leg down will unfold. In theory, the five waves up into April 2010 culminated a big Wave 1 up implying that after a Wave 2 correction, a new advance up will unfold. That Wave 2 correction may have been the sell-off into July.

Clearly a meaningful correction played out from this year's April high into the July 1 low. It was larger in price and time than any prior correction in the advance from March '09 to April '10.

The strength of the rally off the July low argues for the possibility that a powerful new bull leg is underway. However, the problem is that clearly five bearish impulsive waves down can be counted from April into July. If this is true then, the rally off the July low may be seen as A B C corrective rally, the measured move of which projected to 1160/1161. Of course the S&P knifed above 1160 and is holding above 1160.

If July 2010 marked the bottom of a bullish Wave 2 correction walking off the large advance up from March '09, then the most bullish interpretation would be a first wave up into the early August high, a corrective Wave 2 into late August which has been followed by a powerful Wave 3 rally that started at the end of August. That interpretation suggests that following a pullback another leg up in the S&P will attack the April 1220 high.

The next pullback will be critical in helping to determine the big-picture trend. In my view if the position of the market is bullish, the S&P should hold above 1150. In fact, 90 degrees down from Wednesday's 1184 high gives 1150. A bullish fourth wave pullback should hold the prior breakout pivot of 1150 which coincides with the high early in the year.

If the resolution of the current juncture is bullish, then an extension should unfold after a pullback that takes the S&P to a new high on the year to 1245/1250. An inverse head & shoulders projects to 1250 (1010 to a 1130 neck is 120 points added to 1130 gives 1250. In addition, we know that 1173/1174 is 360 degrees up from the August low of 1040: An additional 180 degrees up from 1173/1174 equates to 1243. Both 1174 and 1243 are on the cardinal cross and resonate off the Fall equinox.

As to the short term, the S&P spent all of one day, Wednesday, above 1174, the 360 degree square out up from 1040. On Thursday, after spending basically the entire session below 1174, the S&P closed precisely at 1174 after clawing its way back late in the day.

An hourly S&P chart of the entire move up from September shows what may be a bearish overthrow of a channel . Often these channel overthrows define an emotional climax. It either marks a significant top or at least identifies a smaller corrective pullback that, as said above, should hold 1150.

Importantly, the S&P has now traced out a steeper channel defined by a three-point trendline in October. A break of this three-point trendline implies a test of the bottom of the larger channel and 1150ish. Notable is the last hour's outside up action on Thursday: It's either a bearish backtest of the top of the large channel, or the top of the channel will be recaptured suggesting a further extension.

It could go either way today with it being options expiration and Ben Bernanke speaking about monetary policy. Uncle Ben has a penchant for throwing rice at the marriage of "easy" and "money" on options expiration. The bears are still picking rice out of their skull from a similar episode at the August '07 options expiration. All eyes will be watching to see how the best man, "dollar,"and maid of honor, "gold," behave themselves during today's ceremonies.

The bears are hoping the easy/money wedding ring is from a Cracker Jack box and that the runaway becomes a runaway bride. The bears are hoping that quantitative easing (QE) is priced in or that if not priced in in theory, that there's little money left to act on any leftover animal spirits in practice. In fact, after the market clawed its way back once again on Thursday, Boo the Bear was heard muttering under his breath something about a dude named POMO, saying, "Toto, I know you see no evil, hear no evil and speak no evil, but this is no longer QE2, it's the Titanic."

Of course, once they reached the corner, Boo the Bear took out his accordion and played while the monkey danced for their dinner.

A daily chart of the S&P from the late August low shows the current daily channel and how Wednesday's high tagged a mid-channel line. Here's my takeaway: sine the Key Reversal Day on the last day of the quarter, September 30, the S&P has closed below a prior day's low only once, two sessions later on October 5. Notable is that this was the first time the 20-day moving average was kissed (although it was an air kiss). The next session the S&P offset the key reversal day high which was 1157.15 and stocks have extending their gains ever since. On Tuesday, the S&P traced out a bullish outside up day. Tuesday's low was 1155.69. So we have an important pivot at 1155 to 1157 which ties to 1168/1169 which as you recall is the big "master square" (90 degrees from the 1576 record high and opposite the October 11 anniversary that has played so prominently this decade). As long as 1155 and 1150 in the extreme holds, the trend remains up. Note how the 20-day moving average currently coincides with 1150ish as well.

Click to enlarge

Conclusion: Often the first sell signal gets squeezed as bears jump on board and bulls get defensive. When there's no follow through, bears capitulate and underinvested or sold-out bulls clamor back in. The result is often an emotional, climatic top (often characterized by an overthrow and train tracks) with the second mouse or second sell signal getting the cheese, so don't be too tempted to rationalize parabolas. Be that as it may, there's no second sell signal or reversal yet.

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