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Time Determines S&P Turning Point


The index has gone sideways, closing at the key 1110/1111 level for three consecutive days.


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.

Here come old flattop
He come groovin' up slowly
He got joo-joo eyeball
He one holy roller….

He roller coaster
He got early warning
He got muddy water
He one mojo filter
He say one and one and one is three
-- "Come Together" by John Lennon

As with anything that applies to the markets and life, things aren't always what they seem. There's a primary and a secondary thread stitching the seams; there's a major and a minor note.

There's a ying and a yang to the leaning and the learning; a double helix along the long and winding road.

One of the ways W.D. Gann determined turning points was time. He believed time was more important than price. Gann also used square outs in price and harmonics between time and price to determine potential turning points and changes in trend.

In the market, there's a primary and a secondary trend. Distribution can often be interpreted as consolidation. How do you distinguish between a reaction and the beginning of a new leg down?

What's interesting about the machine-driven markets dominating the financial landscape is that there's little time on the side, as Gann would have called it: There seems to be less time for accumulation and distribution. For example, there was no accumulation at the March low. Will there be any distribution prior to the market shaking out? Is this a new bull market or a counter-trend rally in a big picture bear market?

Did the March low represent a crashing "C" wave low to the "A" wave down from 2000 into 2002 with the move up to the marginal new high in 2007 the "B" wave?

That's one of the reasons it becomes imperative more than ever to anticipate potential changes in trend. The trouble with the anticipation is that it can color your opinion and make methodical, unemotional bets more complicated.

One of the ways I reconcile the conundrum of being intellectually bearish, for example, in anticipating a turn while playing the short side is to keep the shorts on a tight leash. At the same time, it becomes critical to require confirmation and follow through from sell signals in an ongoing cyclical uptrend: There are many false short-term sell signals given in rallies just as there are many false short-term buy signals given in bear phases.

This is the ying and the yang of it. The mirror and the pendulum playing hide and seek. The picture of the market is not a Rembrandt; it's more of a Picasso. While we have to believe what we see, it isn't easy to reconcile a head from a shoulder and a toe from a nose.

While there wasn't any accumulation at the March '09 low like there was going into the March '03 low, there was certainly compression. The mechanical part of believing what you saw to confirm a reversal and a rally phase of unknown determination at that low was on the move back through the 2002 low of 768 S&P. At that point, you had to believe what you saw.

Recapturing the 2002 low suggests a rally of at least three to six weeks. When the rally surpassed that time period, it opened up the notion for a three-month rally. There was a correction from a June high with a potential head and shoulders being carved out. When the July low, which we expected, played out according to plan, I anticipated a test of the June high, and stated that if the June high was offset, it paved the way for yet higher prices into September and 1000 to 1010.

When the three-month high was exceeded, the normal expectation was for a potential six to seven month advance. The market has exceeded that time period implying that the market could run up to next March.

At the same time, it's possible that the October high in the seventh month was an orthodox high with the current retracement being a backtest. Moreover, if the market has an agenda to run up into next March, I doubt it will do so without a significant shakeout first.

The S&P range from the July low to this week's high is 243 points. Fifty percent of that range is 121.50 points. If the 1111 level defined a high (with 1111 being opposite the March low and 90 degrees from the price of 666), then a pullback of 50% of the range from July equates to approximately 990.

Interestingly, this is near the original projection of 1000 to 1010 in the summer. Be that as it may, the monthly chart is stretched and, as shown over the last month, there are a myriad of price projections and levels that converge here, not the least of which is a simple trendline drawn off the October 2007 high which was tagged over the past week.

It's also interesting that the anniversary of the crash last year near November 21 is about 243 natural days of the year (by natural I mean counting from the beginning of the true year or March 21). So near the anniversary of the Crash of '08, the range of the last swing up from July will square out at the number of natural days of the year.

It's another piece in the puzzle for a possible change in trend. We'll have to follow the strands of DNA if a sell-off plays out to determine what kind of correction is in the cards. We'll have to read the market's hand one card at a time.

Conclusion: The S&P has gone sideways for three days, closing at the key 1110/1111 level for three consecutive days. The bulls would love to stampede the market over the widely watched downtrend line from 2007 and drive the S&P up to a measured move that would equate to approximately 1159 (666 to 956 = 290, 869 the July low plus 290 = 1159).

The inability of the bulls to jam the downtrend line may be telling. The inability of the market to capitalize on a declining dollar yesterday may be telling. The implication is the cycle due this week is exerting its influence.

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No positions in stocks mentioned.

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