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Don't Be Fooled If There's a Market Comeback Today


Monday could open down hard.


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.

"Well, I stand up next to a mountain
And I chop it down with the edge of my hand..."
-- "Voodoo Child," Jimi Hendrix

"The best players allow their adversaries to believe they are in a winning position."
-- Anon

"If a victory is told in detail, one can no longer distinguish it from a defeat."
-- Jean-Paul Sartre

"...It is up to you to give it a meaning, and value is nothing but the meaning that you choose
-- Jean-Paul Sartre

They say the market usually (not always) gives a graceful exit. We're about to find out if stock bulls and dollar bears missed that graceful exit.

As I wrote in this space on the first report of 2010 the morning of January 11, if the market scores an opening first hour spike high, it may mark the high for the year. That was a graceful exit. Yesterday's retracement to 50% plus of the January/February decline and a backtest of the 50-day moving average looks like it may have been another graceful exit -- after the close, the Fed raised the discount rate and the futures got creamed, down 12 points.

It seems "Bombardier Ben Bernanke" has a penchant for surprising the markets prior to a Friday option expiration opening. It seems Mr. Bernanke likes the smell of napalm on options expiration morning. The remembrance of a Friday morning in August 2007 looms large in Bernanke's legacy of lobbing grenades at the Street. "Aw, Coop, you're probably paranoid living in Mel-ibu too long. It's probably just a coincidence." Maybe so, but someone somewhere is poised to pluck some bucks and ring the cash register on some cheap 110 and 109 February SPY puts today. Remember -- the Fed isn't a federal agency at all but a cartel of big banks that does the bidding of big banks. If their interests were the interests of the American citizen, their presumed mandates to preserve the value and buying power of the dollar and to prevent panics and promote near "full employment" would be followed. (Insert your own joke here.)

Suffice to say that the Fed was working overtime after the close to convince the world that "this was not a tightening move," and all the pundits will be using every adjective in the dictionary. Every analyst will be dragged out of inner sanctum hyperventilating their view about why this is or isn't the beginning of the Fed's Exit Strategy. However, at the end of the day, actions speak louder than words, and no matter how much hyperbole the Fed and their minions throw at the market, it's the market's reaction to and interpretation of the Fed's action that counts. Like a screaming, hyperventilating Faye Wray in the hands of King Kong, the extenuating bullish views on the market by those caught off guard are no love match for the beast of the market's verdict. King Kong may climb to the top of the Empire State Building against all odds, against the prevailing winds, but how long can the beast hold on? How long can he hold an unnatural stance and an unnatural attraction until the natural-forces-of-the-market gods come to bear?

King Fed decided to try to circumvent the bear market from 2000 to 2002 and helped promulgate a real estate bubble that in 2008 caused a more devastating crash than the technology crash. King Fed decided to circumvent the bear market that started in 2007 and as a result has built a Tower of Debt unBabeled and unrivaled in human history. We're nearing zero hour when the Chickens of Risk come home to roost.

Richard Russell:

"…what has been the legacy of the billion-dollar bailouts and the billion-dollar stimuli? What has been the legacy of trillion-dollar deficits and monster debts running into the future as far as the eye can see? All these machinations and manipulations have placed the US in one of its weakest positions in its history. Now we hear talk of actually lowering the credit standing of the US, an idea that would have been considered unthinkable prior to 2008."

Just as the S&P walked up to the top of an ascending triangle on its daily chart before falling off its spire in January, so too have the hourlies traced out a fractal of the climb from the November '09 low to the January '10 peak. In other words, the hourly pattern from the early February low is a fractal of the daily climb from the November '09 low. And, with the Fed's push, the S&P has fallen out of bed through the bottom of the ascending triangle in after-market trade.

Checking a price channel of the hourly S&P shows initial support comes in near our old friend 1080, the high before the high, the high in October prior to the January high. What's with the 1080 pivot anyway? Well, the March 666 low X 1.618 gives 1080. That's something.

In addition, as you know, 1078/1080 is 90 degrees up from the recent 1045 low. Today's high on the SPY at 111.14 was a perfect tag of 180 degrees up from the 1045 low. It also represents a .618 retrace of the January/February decline. That satisfies price projections. As you know from yesterday's report there were numerous turning points in time and harmonics related to the time and price of prior highs and lows that came out yesterday. A break of 1078/1080 should confirm the idea of a bearish backtest. A break back below 1080 implies the market is rolling over from a lower high of a lower high and should elicit downside acceleration. A measured move of the 105 point S&P January/February decline projected from yesterday's S&P high gives 1003. Checking the monthly S&P chart from yesterday's report shows that the high in the important month of November 2008 was 1007.

Interestingly, the mid-point of the January reversal bar 14 months later is 1111. It appears the S&P was rejected from a picture perfect backtest. A measured move to 1003ish satisfies a compelling number of technicals:

1. undercut of the 200-day moving average

2. a turn down of the Quarter Swing Chart (the October low of 1019.95)

3. a full cycle of 360 degrees down in price which equates to 1018/1019

4. In addition, as offered in mid-January, when I assumed a top was at hand, 1003 corresponds to the January 11 pivot high. Why? 1003 is opposite January 11. It may not play out this way, but seldom do the technicals setup so convincingly with the prospect for a measured move of a 105 S&P points -- and a potentially quick 105 point haircut.

And, that's the bull case.

If the 2008 global meltdown was not just bad subprime loans going belly up but a warning sign that the entire world financial structure was overextended and about to unravel, then this is the eye of the hurricane and the financial tailwinds could begin to flail at psychology and risk appetite as sentiment shifts toward a perception that the Lone Ranger has not only used up all his bullets, but is looking for an exit out of the wilderness.

"You are alone now. Last man. You are lone ranger."
-- Tonto

Question: Were Central Banks moving a few hundred billion of bad debts off the books of the banks and playing a shell game with CDOs, merely rearranging the chairs on the deck of the Titanic? Will the sounds of violins in the last year playing to the tune of "If I Were A Rich Man" give way to Beck's Lost Cause? I suspect that to a blind man, the sounds of violins playing on the Titanic meant the night was going just fine. Heads up for icebergs in the Aegean. Beware Trojan bulls bearing bids. Beware Frankenstein Fed.

Richard Russell:

"In her famous novel, Mary Shelley writes about what happens when man circumvents the law of the gods. The good doctor creates a creature and gives it life. The result is the creature-monster, both pathetic and horrific -- Frankenstein. But Frankenstein revolts against his maker and turns into a killer. It's the story of man interfering with the natural forces of nature and the gods."

Is there any exit for the Creature from Jekyll Island?

Bonds broke again on Thursday and are starting to look ugly. Inflation is picking up. This may have forced the Fed's hand. It may be better for them to look like they're taking a tightening stance rather then let the bond vigilante's get the upper hand. Either way the US has enjoyed the luxury of funding its massive debt load with low rates. What happens if rates start to ratchet up and growth and the economy is not there to pick up the baton? What happens to the cost of borrowing for Uncle Sam? Is there an exit strategy for the Fed that is viable?

Conclusion: As offered yesterday, I thought there was a chance for 1111/110 to be tagged but said that if it occurred it should be short-lived -- as in, hours. The SPY hit 111 yesterday. Our turning point date arrived and it looks like the cycles are exerting their influence. The news breaks with the cycles, not the other way around. It feels like the majority of the move this week was related to option expiration baskets. It looked like small baskets hit the market every half hour or so the last two days. Consequently, we may not see the true trend until after option expiration and the cycles both hit. It's possible that the market could hold up into the close, but if the cycles have turned then I wouldn't be fooled by a "comeback" on Friday as Monday could open down hard.

If the S&P can hold 1078/1080 on a decline, it's possible the market could claw its way into the first week of March for the next cycle turn based on the 10-year cycles so the tale of the tape will be telling based on the important weekly Friday close and Monday's close. Remember, Friday closes are important as it shows the willingness of traders to carry over positions, or conversely their desire to clear their books.

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