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Will Friday's S&P Action Change the Trend?


Follow-through will be key.


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.

She's a rainbow and she loves the peaceful life
Knows I'll go crazy if I don't go crazy tonight
There's a part of me in the chaos that's quiet
And there's a part of you that wants me to riot
Everybody needs to cry or needs to spit
Every sweet-tooth needs just a little hit
Every beauty needs to go out with an idiot
How can you stand next to the truth and not see it?
A change of heart comes slow.....

-"I'll Go Crazy If I Don't Go Crazy Tonight" (U2)

Dorothy (arriving in Oz, looking around and awed at the beauty and splendor): "Toto, I've a feeling we're not in Kansas anymore. We must be over the rainbow!"

(A bubble appears in the sky and gets closer and closer. It finally lands, then turns into Glinda the Good Witch.)

Dorothy: "My! People come and go so quickly here!"

Wicked Witch of the West: "And now, my beauties, something with poison in it, I think. Something with poison in it, but attractive to the eye, and soothing to the smell. Poppies...poppies. Poppies will put them to sleep."

From the Brazilian Macumba priestess Maria-Jose:

Macumba is the central axis, the center around which human activity is arranged... . Everything can serve prophecy. You only have to pay attention. The world is full of signs. When you learn to look at the things the right way, you will understand what I am trying to say. The shape of clouds, the way birds fly, the sounds of nature, an unexpected meeting…all these transmit a message that expresses the will of the Gods. The universe is a whole that fits together logically and that maintains itself and develops in a meaningful way.

Every dog has his day in the sun. Every bear market has its rally. Every advance has its correction. Except this one -- or so it would seem for now.

In the same way perception can suspend disbelief for a time, so too, every balloon finds a prick. In the same way value lies in the eye of the beholder, too many beholders dancing on the head on a pin will tumble from their leap of faith.

Free money frees animal spirits. The unintended consequence is we become prisoners of risk. The trail of money throughout the ages leaves a baffling path.

An interesting perspective on money in the twentieth century came from a former director of the Bank of England, Lord Josiah Stemp, who in 1937 said, "The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented...if you want to be slaves of the bankers, and pay the cost of your own slavery, then let the banks create money."

Money, the poppies of wealth.

He continues:

As far back as 700 BC people found they could expand economic well-being by using things like shells, sees, rare stones, and bits of metal to facilitate trading. In the past three centuries it was deemed more convenient to keep precious metals in vaults and use paper money that could be exchanged for those precious metals…the paper bill was originally the equivalent of a receipt showing that the bearer owned an amount of precious metal, but the paper receipt was more convenient and transportable.

Transportable -- that's and interesting concept. As in transporting capital to other countries. Then of course the world became digitalized and the velocity of convenience and "transportability" expanded at the speed of light.

However, paper money brought out mankind's inclination for self-destructive greed, and this trait mushroomed during the last quarter of the twentieth century and the beginning of the twenty-first century.

"Money has become almost pure abstraction delinked from anything of value" (from When Corporations Rule the World by David Korten, 2001). "There are two common ways to create money without creating value," continues Korten. "One is by creating debt. Another is by building up asset values. The global financial system is adept at using both of these devices to create money delinked from the creation of value."

I promise, I won't ask you to do this again, but reread the comments above. I think they speak directly to the large transformations and disconnect reverberation throughout today's financial markets.

Former US Treasury Secretary Nicolas Brady put it this way: "If the assets were gold or oil, this phenomenon (unrestrained creation of more and more dollars) would be called inflation. In stocks, it's called wealth creation."

Kansas, I don't think we're in Toto any more.

In our bones, I think most of us feel like a hoax is being perpetrated.

The distinction between the economy and the financial system hit a monumental inflection point last year, and that disconnect has blown up again.

Investors usually seek as much profit as quickly as possible. Those profits may or not benefit the overall economy. What does it mean when billions of dollars are made and lost in instantaneous computerized trades having nothing to do with the production of goods and services or the raising of capital?

I heard that….

"They call me Mr. Liquidity."

In the Wizard of Oz, Toto, a dog, exposes the Wizard as a fraud -- an ordinary man hiding behind a curtain operating a giant console which contains a group of buttons and levers. The wizard explains that he, too, was born in Kansas and that his presence in Oz was the result of an escaped hot-air balloon. Can America find its way home like Dorothy? Was the journey from October 2007 just a bad dream or are we on the road to Munchkinland where the path is paved with all paper that's fit to print?

Debt, the drug of democracy.

The Market:
We may have seen a change in character in the market this week. After the first key reversal to the downside on September 23, the normal expectation would be for a decline that saw the weekly swing chart turn down. That expectation was satisfied with the S&P declining for seven days. However, after Wednesday's key reversal, the market couldn't even stay down for one day. That's atypical price action and could have suggested a runaway move.

However, importantly, I think, the S&P rolled over immediately on Friday upon turning the daily swing chart back up on trade above Thursday's high. This suggests that the rebound on Thursday was a backtest with Friday's action suggesting a change in trend. Follow-through will be key. At the same time, the market (or someone) certainly knows the 1073/1074 pivot which is the high from the Autumnal Equinox. The S&P found support there on Wednesday and Friday.

This is a key level because it represents the prior swing high. Moreover, 1073/1074 is 90 degrees or square from September 23, the date of the prior swing high. A square out six months from low at/near the level of last year's breakdown would seem a reasonable place for the market to pause. Trade back below that level this week that sticks could imply that the move in October above the September highs is an overthrow. Assuming the market is at resistance, will it pause or does it have something more dramatic in store?

Click to enlarge

Conclusion: 50% of the month's range on the S&P of 81 points (nine, squared) gives 40.50 which ties into the 40-41 Biblical day trading count shown last week (keep in mind that when the chart was created we were eight days away from this week's turning point) and repeated here. Wouldn't it be interesting if the S&P broke 50% of October's range as this 40 to 41 day trading count hits this week?

Another important tell will be the action in the banks and Goldman Sachs (GS). Note the breakout on the BKX eight sessions ago and the immediate boomerang back through prior highs. A trade by Goldman back through its prior weekly swing high of 171 from the week ending August 7 should be at least one nail in the coffin of the current advance. Why? Besides trade back through a prior weekly swing high, it also coincides with a break of a weekly trendline up from 2008 as well as a break of a necktie of its 20 and 200 day moving averages.

Finally, the RUT left an outside week down with a close below the week's low. The divergence in and the lag in the RUT is a red flag because small companies are historically leaders out of recessions.

Strategy: Blowout earnings in Microsoft (MSFT) and Amazon (AMZN) provided the perfect excuse for the bulls to jam the broad market higher, but the bulls snatched defeat from the jaws of victory. With fiscal year end for many of the big funds days away, a plunging low to 50% of the monthly range or approximately 1060 can probably be bought the first time, however a break of 1050 should lead to a panicky down draft.

Why bother to try to anticipate a peak? If the primary trend of the market is, in fact, down and the secondary trend is rolling over, the character of the market could change quickly.

Trading Lessons:

No positions in stocks mentioned.

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