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Black Hole Friday


The trigger for an unwind of the dollar carry/risk trade has been squeezed off.

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.

In disguise as no one knows
Hides the face, lies the snake

-Black Hole Sun (Soundgarden)

I have noticed even people who claim everything is predestined and that we can do nothing to change it, look before they cross the road.

-Stephen Hawking

Don't wait for the last judgment -- it takes place every day.
-Albert Camus

I wasn't planning to do a report this morning due to the holiday and today's half-day session. But that was before Dubai Bye.

That was before fears about Dubai debt hit global markets. Is today destined to be singed into the markets memory as the day Boo did the conga through world financial markets humming, "I say hello, you say Dubai?"

Whether Dubai debt is a just a catalyst and excuse for profit-taking, something more fundamental, or a set-up for the Lou Ciphers of big-money programs sprung to trap the majority of fund managers sitting fat and happy and waiting for the obvious trend higher, doesn't much matter at this point -- it is what it is. The trigger for an unwind of the dollar carry/risk trade has been squeezed off. And isn't it special that the "redistribution" of wealth trade occurred while the US was stuffing its face.

The telltale sign that not all was right with the world was the inability of our markets to capitalize on the "breakdown" in the dollar on Wednesday. Moreover, the Dubai world-standstill was in the news on Wednesday. Was The Fuse, a distant cousin of The Hand, at work? The standstill was in motion and carefully planned, not a kneejerk move. Were the last two weeks of sideways action at 1111 what Gann would have called "time on the side"?

And, what it is, is the magic axis of the 1111 square out. It's worth taking one more look at the time/price set-up that I've shown a number of times over the last few days.

Click to enlarge

It is what it is -- and what it is, is the fact that while the trading world may have felt "safe" in assuming that the markets were buoyant to up at least until the S&P had satisfied its 50% retrace of the bear at 1120, the S&P satisfied another 50% mark inasmuch as 1111 is 50% of the range from the March 2000 peak of 1553 to the March '09 low of 666. Apparently, the Dow Jones Industrial Average did a "lone walk" up to its 50% retrace. But, as shown recently, the 10,400 level, plus or minus, has been critical for a decade.

Now come the pundits with their rear-view mirrors about how the correction was overdue and how there was no way to know it was here.

But, as you know, there were signs aplenty, and when the weight of evidence stacks up and there's a confluence of time and price harmonics, sometimes stops just don't work and the market knifes through stops with a vengeance. Like a thief in the night when you least expect it.

The market usually (not always) offers a graceful exit. The snap-back to a marginal new high in November after the break in October was, in my opinion, that graceful exit. Few likely took it. Moreover, more players probably bought into the mindset that stocks were on cruise control into year-end and were waiting for the Santa Claus rally.

However, as you know,1080 months ago in November 1919 -- a key 90 years ago -- the market traced out a blow-off into November and proceeded to sell off approximately 10% into year end. I suspect the last thing that market participants of the time were expecting at that time was a 10% decline into year end.

The most crowded trade -- the most prevalent position and mindset in the financial markets of late -- has been short of the dollar, closely followed by the notion that the markets would melt up or at least mark up into year end. I think that mindset is poised to shift significantly today, with the scramble to protect profits going into year-end coming front and center and overshadowing the buy every dip strategy.

As offered above, the market usually gives a graceful exit: The two-day sell-off from 1111 to 1086 into November 20 was the last exit from Tape Town this year in my opinion.

That decline failed to tag a 90-degree move down from high at 1080/1078. This morning's breakaway gap to below 1080 suggests the die is cast for lower prices; 180 degrees down equates to 1046; 360 degrees down equates to 980ish and the roughly 10% break that played out 1080 months, or 90 years ago. A momentum gap below that 1 X 1 monthly "tunnel through the air" or one point per month, or 1080 S&P equates to a break of the prior high in September. September 23 and the Autumnal Equinox to be precise -- which was a Key Reversal Day.

A move below 1080 going into the end of the year here suggests the Risk Trade is in trouble as money managers rush to protect profits rather that perceive the sell-off as just another setback and a buying opportunity.

Worth considering is the swiftness at which the market turns when it tags a price harmonic. The low at 666 was a .618 retrace of the entire range from the 1982 to the 2007 peak. The 2002 low was precisely 50% of the 2000 high. Note the low in July, which approximates 50% of the range from 1576 to 666 at 840ish. The normal expectation would be for the market to pullback from the 1111 level. Now what remains to be seen is the nature of the pullback. Will it get to 980/990 or even the opening range for the year at 950ish?

Imagine the daily chart for the year as a ten-minute chart for a day: Many times we've seen the market run higher off an opening-range breakout only to see a swift sell-off into the close that pulls back toward the opening range of the session. The last six weeks of the year may be viewed through the lens as the last hour or so of a daily chart.

Note how often the 1215 (to 1230) level on the monthly S&P chart from 1998 comes into play. This is a .618 retrace of the March '09 low to the 2007 high. It approximates the level of the low before the high in 2000. The high of a consolidation following the run-up off the 2003 low. Note the breakout and back test of this level in 2006, which was then once again "the low before the high." Then 1215-1230 once again proved to be a key level in 2008.

"The low before the high" if broken implies lower prices. This implies that the November 2 low of 1029.40 is a critical level. Trade below that level in December will turn the Monthly Swing Chart down. If the market accelerates on such a turn down should it occur it will be a bearish sign? Keep in mind that 1015ish S&P represents a .382 retrace of 666 to 1576.

We hardly know what the ramifications are and what it means if Dubai is telling the world it wants to "reschedule" debt. But this morning, the world believes reschedule translates into default, and is selling first and asking questions later.

Trading Lessons:

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No positions in stocks mentioned.

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