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Are the Markets Ahead of Themselves?


If so, we could experience some reversion -- if not revulsion -- to the mean.


Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a 2-week trial FREE trial of his daily commentary and nightly day and swing trading picks, click here.

You float like a feather
In a beautiful world
--"Creep" (Radiohead)

2009 witnessed the kind of milestones that aren't forgotten easily. Yet they seem to have been relegated to a bad dream. The 20-month bear market from October 2007 to March 2009 saw a decline of 57.7 % in the S&P. This makes the bear market the second worst bear in the past 80 years, eclipsing the bear market of 1937-1938 (54.5%).

While the year began with a universality of fear and risk aversion, this subsided as selling eased and animal spirits found green shoots to nibble on.

After the hangovers of a global real estate bubble burst, a global credit crunch, a global financial crisis, and a global recession, the hope is that the global economies are beginning to recover. If they aren't, reminiscences of the crises could stir fears of a double dip.

Even if there is no double dip, the question must be asked, whether the markets are ahead of themselves and we'll experience some reversion to the mean -- even if it not a panicky revulsion to the mean.

With buy and hold getting discredited the last decade, it can be expected that tactical investors continue to excel in a largely trading-range-dominated environment. 2008 was a linear move to the downside. 2009 was a linear move to the upside. Market timing should be a valuable tool once again in 2010.

The Dow Jones Industrial Average and the S&P have both rallied near 70% off the March lows. Bears can't help but wonder if it's the 70% solution, as they eye the prospect of a major head-and-shoulder top pattern developing since 1997. Potential left shoulders show near the 1999/2000 peaks at 11,550 to 11,750 on the DJIA. A possible head may be the October 2007 high near 14,000. It's worth noting that the recent short-term head-and-shoulders breakout from July/August above approximately 9,000 projects to approximately 11,700. However, it's also possible that a very bearish "slump right shoulder" is traced out with the DJIA forming a right shoulder near current levels. It's worth mentioning once again that January 1980 marked a Spike and Reversal pattern preceding a panic, and that this period in time ties to the upper 10,000 to 11,000 level.

  • As you know, four cycles in price up from the 666 S&P low equates to 1143.

  • The date of the last swing low (Nov) is opposition a price of 1160.

  • The price of the last swing low (1029) is opposition to the November low, something I didn't see at the time.

  • 1161 is 360 degrees in price up from the November low.

  • A measured move from the March low to the June high and from the July low projects to 1158.

If you take the number of days from the October 2007 top to the March '09 low, you get 512. Checking the Square of 9 chart, we see that 512 aligns to January 17 which is this Sunday. That puts Friday/Monday into play. Friday, of course, is the first expiration of the year and a solar eclipse. Seems pivotal.

In addition, the advance (so far) off the March lows has been 485 S&P points. 485 vibrates off 1158 on the Square of 9 chart and ties to the first week of November in time. In other words, the range of the rally to date "squares out" near current levels and ties to the date of the last low.

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Finally, the decline off the 2007 high to the March 2009 low was 910 S&P points. 910 squares this week (it's 90 degrees from today). At the same time, 910 is opposition mid-October, the time of the high in 2007 from which the range is being measured. In other words, the range of the bear market at what may be an ABC big picture retracement squares the high of the bull market to mid-January. Moreover, 910 resonates off the price of 1167.

Conclusion: It seems that somewhere between 1149 and 1169ish that the creeping confluence of time and price should converge to give a multi-month correction into the key March pivot, and that rather than a one-year low to high cycle, we see a one-year low to low cycle. The question is, if we do get a pivot low in March, how significant will it be and how long lasting will it be?

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No positions in stocks mentioned.

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