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Market Direction Into the FOMC


The earliest a low could set up is early February, 90 degrees in time from the November low.

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 swing-trading picks, click here.

"I'm changing faster than the weather."
-- Old Brown Shoe (The Beatles)

"I know you've become such a coward that you'll grab at any lousy excuse to get out of killing your pipe dreams. And yet, as I've told you over and over, it's exactly those damned tomorrow dreams which keep you from making peace with yourself. So you've got to kill them like I did.
-- The Iceman Cometh (Eugene O'Neill)

"When you fall through the ice, you have a limited time to get out and on top of the ice or hypothermia sets in. Down moves and inflections are the same. If the bull does not recover fast, he sinks to the bottom of the pond for awhile."
-- Minyan Ken

The January barometer is on the line. If the month of January ends up, so goes market lore, it's a good omen for the market for the balance of the year. Conversely, if January ends down, it points to a down year. The policy makers and money managers know this: How far will the central planners and the bulls go to insure January makes it into the green?

Everyone knows "the world" is ripe to buy the first big shakeout, right? So, does that mean the correction will be deeper than anticipated? Assuming I'm correct that the market is in a serious correction, the question must be asked whether it will be a garden variety 10% or so affair and a kiss of the 200-day moving average or something greater.

While the January Barometer hangs in the balance, the bulls have their work cut out for them with the Dow Jones Industrial Average tracing out an outside down month and the S&P hanging by a thread above the critical 1080/1085 level. Will the second shoe drop as early as today? Does the iceman cometh?

The S&P closed the month of December at our old friend 1115.09. The DJIA closed the month of December at 10,428. And the weather is getting rough.

The January Barometer is in play against the backdrop of politicization of the Federal Reserve coming further into the light and the Bernanke Quid Pro Quo Show and the current administration digging in its heels after hearing from the people rather than moving to the center like Bill Clinton. As President Barack Obama said yesterday, "I'd rather be a really good one-term president than a mediocre two-term president." The Iceman cometh.

The president seems to be leading with his chin and if it proves to be glass, the market could crack with it. The new administration brought with it hope for change not for the sake of change. It brought hope for hope and the market rallied whether by hook or crook without much of a pit stop. When hope dwindles vitality fades. If the icon of the office of the presidency becomes embattled, as was the case with Richard Nixon, the market languishes, or worse. When the president flails like Don Quixote rather than taking a pragmatic stance, the market often suffers. At the dawn of the decade, the presidency, the Fed, and the Treasury are being buffeted by winds seeking to up-end them. The Iceman cometh?

With the Bernanke nomination becoming tailored in tweed, the Tammany variety, the dollar, gold, and the Inflation/Deflation Titans take center stage like the Gangs of Washington. Is it King Kong falls for a hyperventilating Faye Wray or Godzilla takes the Senators' villas? Imagine, Time magazine's Man of the Year fighting for his job: Bernanke meets Abbott and Costello? Dr. Jekyll Greenspan and Mr. Hyde Bernanke -- well, have you ever seen them together? Listen to that sweet low-down clarinet zero rate notes.

The market is in a serious correction. It remains to be seen whether it will be a full-blown correction or even the start of another leg down in a bigger-picture bear market. The market is in a serious correction with institutional selling as last year's highs on the popular indices (1030 S&P) and the 1121 mid-point retracement of the bear market were violated on the downside. And, we still haven't seen a 90% down day despite the two large-range linear stabs down last week.

As offered yesterday, we should see a six- to seven-hour rally on Monday. Yet despite the market holding the green, the threat of a market on close buy program that could see some real squeezage in the shorts went MIA. I guess it was MOC, MIA.

The inability of the market to rip into the bell yesterday is a sign of weakness and points to a second shoe ready to drop this week. The market could stabilize into the Fed meeting but I wouldn't hold too many longs too long because the next leg down could be a blood bath with the point of recognition setting in that the market has work to do.

Below 1082/1083 S&P (180 degrees down from the 1150 swing high) which coincides with the December lows are targets of 1050 (270 degrees down) and 1019 ( a full cycle of 360 degrees down). Interestingly, the Quarterly Swing low on the S&P is at 1019.95, which was the fourth-quarter low that occurred on October 2, 2009.

If the market is constructive and is tracing out a bullish pullback, a turn down of the quarterly low should define low relatively soon in time and price. This could also coincide with a potentially bullish test of the rising 200-day moving average, which is currently 1008 and rising. A correction that holds/undercuts the 200-day moving average while turning the Quarterly Swing Chart down could carve out a potentially bullish second higher swing low off the March low -- with the July low being the first higher low. Note that the July low also found support at the widely-watched 200-day moving average.
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No positions in stocks mentioned.

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