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A Study in New Swing Theory


Understanding how to put this methodology into practice.

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.

You get a shiver in the dark
It's raining in the park but meantime
South of the river you stop and you hold everything
--Sultans of Swing (Dire Straits)

Life is like riding a bicycle. To keep your balance you must keep moving.

--Albert Einstein

From my vantage point, today's report is important. Perhaps one of the most important I've written in a while. Not because of its timeliness necessarily (although that may prove to be the case), but because of the method behind the madness, the putting of swing theory into practice.

Let's recap a little. Once it became clear late last year that the market was going to hold up and avoid a steep sell-off, it became an easy call to anticipate that the Yearly Swing Chart would turn up early in 2010. The Yearly Swing Chart turned down in 2008 on trade below the low in 2007. The low for the year in 2007 occurred in March (another March pivot) at 1364 S&P. That low was violated in January 2008 (another January pivot) and turned the Yearly Swing Chart down. After a decline to 1257 in March '08, that yearly swing pivot of 1364 was tested in May 2008 on an advance that significantly exceeded 1364 with a high of 1440. However, the value of swing theory is that it marries time to price; they're harmonically related -- in other words, the advance into May 2008 traced out two consecutive monthly higher highs after the sharp break indicating a high was being defined if the trend was bearish. When the 1364 level -- the level where the yearly chart turned down -- was "re-violated," a Time Turn Trend sell signal was issued.

The Yearly Swing chart has stayed down all the way through 2009. On the first trading day of January 2010, the S&P traded above the high for 2009 and turned the yearly chart back up for the first time since January 2008. This two-year period or 720 degrees in time is important as discussed in a recent report touching on the Vesica Pisces (The Ides of the Circle). It represents a complete cycle or sinusoidal wave of interlocking 360 circles.

The normal expectation if the primary trend was bearish would be for the turn-up of the yearly chart in January 2010 to define a high relatively soon in terms of both time and price. It did. However, at the same time the normal expectation when a big wheel of time such as the yearly turns is to expect a Reflex Rally. We got a doozy: a 9% decline in three weeks. The 64-million-dollar question of course is whether that was a bullish correction and tangentially whether the rally back up is a bearish backtest. As you know, at the time of the correction, I offered that there was a "decidedly bullish potential" playing out. Why did I say that? Because the monthly S&P was tracing out the first two consecutive lower lows since the March 2009 low. This set up the first Plus One/Minus Two Monthly Buy Pattern since the March low. At the same time, believe it or not, the Three Week Chart turned down for the first time since March on the decline into February 2010. This month we should find out if the bullish or the bearish pattern will dominate: Will the Monthly Plus One/Minus Two trump the January reversal bar and the potential bearish turn-up of the yearly chart? There's a lot of potential for both the bulls and the bears from these patterns. However, it cannot be overstated that if the market is still in the throes of a secular bear trend, then the turn-up of the Yearly Swing Chart should define an important topping process. And, just as in the July/October 2007 period, this is a process that could extend months.

The S&P has exceeded the 50% point of the January/February decline and has even exceeded a .618 retrace of the Jan/Feb decline stirring many bovine animal spirits, the object of whose affection is a shot at 1230ish S&P and a 5/8 Retrace of the prior bear market. Rally above the 50% and .618 level of this year's sell-off put the market back in a strong position, a position to attack the big 1121 mid-point, the 50% point of the entire 2007/2009 bear market. While the 50% Principle is important and Fibonacci levels meaningful, swing pivots as defined by New Swing Theory combined with cycle analysis (such as the 30-month cycle study below) are integral in determining trend.

January defined a high on:

1. The anniversary of the Dow Jones Industrial Average mid-January high on the decennial cycle (from 2000)

2. Days after the Yearly Swing Chart turned up

3. At the 30-month cycle high expected turning point.

Note that I used July 2002 when the S&P/DJIA made climactic/waterfall lows to measure from. October 2002 was a marginal undercut test. The next turning point in January 2005 while it defined a high, a short-term high with a marginal sell-off, actually defined more of a mid-point; a resting place. This is an important concept: Most technicians think of turning points as undeniable highs or lows or the cycle is false; however, turning points can be highs, lows, or mid-points (which act as eventual acceleration points).

The low of the month of January 2005 was 1176. Adding 1176 to the price low of the bear in October 2002 (769) gives 1583. The all-time record high in the S&P was 1576. Moreover, the important July 2007 high occurred 30 months (2.5 years) following the January 2005 time zone. The high in July 2007 was not near 1583. It was 1556. At that time one couldn't have been faulted for concluding that 1556 was near enough to the 1583 projection. Especially following the sharp sell-off from July 2007 into August that year. However, the number 1576 was flashing like a neon light in Vegas beckoning the S&P to take another turn at the table, another spin at the Wheel of Time & Price.

Click to enlarge

Click to enlarge

To wit, 1576 (the record high in October 2007) is precisely SIX "squares" or full revolutions of 360 degrees up from the 768/769 bear market low.

This is one of the reasons I forecast 1576 as a high at the time. My reasoning was that if six "squares" of 90 degrees is an important measurement being a true square -- a cube having six sides of 90 degrees each -- then it would follow that six complete squares of 360 degrees should mark an important culmination. It did. When the S&P traded up to 1576 THREE months (90 degrees in time) later in October 2007, time was up. Time squared price as October 10/11 are 90 degrees from the price of 1576. This is the same relationship that occurred in March 2009 with March 6 to 9 being 90 degrees from a price of 666/667.

Conclusion: Despite a strong sell-off in the dollar on Wednesday, at the end of the day, the bulls were unable to capitalize on it to carve out a close above the widely watched 1121 level. Instead we got another day with a strong open and late selling. For the second consecutive day the S&P couldn't capture 1121. Wednesday's reversal left a long topping tail from the Big Mid-Point (1121).

Will a third time be a charm for the bulls? Will the bulls muster a bid before Friday's important unemployment data? Will the data itself be "doctored" to show dour numbers in order to help push through another proposed stimulus program? These things don't happen -- do they?

Strategy: Trade over the January monthly reversal bar should ignite a run to the object of the bulls desire: 1230ish or the 5/8 Retrace of the prior bear market. Of course, first, the idea of a bearish backtest of the Yearly Swing Pivot at 1130 must be discredited. Will a rally that offsets Wednesdays "tail" imply a breakout over 1130 or a final Kiss of The SPYder at a perfected backtest at 1130?

As an hourly chart shows, our old friend 1111 seems to be the hinge on a trap door for the bulls. A break of 1111 from here will trigger a hourly Rule of Four Sell Signal, or a break of a rising three-point trendline (the fourth time through typically sees follow-through). This is a fractal of the pattern that played out in January leading to a sharp sell-off. Stabbing back below the 50-day moving average which roughly coincides with 1111 would mimic the analogue from the 1987 waterfall as touched on yesterday. Stay nimble.

Trading Lessons:

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