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Comparing the 1932-1937 Rally to the 2009-2011 Rally


There is some interesting, mirror-image, fold-back symmetry at play here.

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.

We skipped a light fandango
Turned cartwheels 'cross the floor.
I was feeling kind of seasick,
But the crowd called out for more.
The room was humming harder,
As the ceiling flew away.
When we called out for another drink,
The waiter brought a tray.
-- "A Whiter Shade Of Pale" (Procol Harum)

"She should have died hereafter;
There would have been a time for such a word.
To-morrow, and to-morrow, and to-morrow
Creeps in this petty pace from day to day,
To the last syllable of recorded time'
And all our yesterday's have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing."

--Macbeth, William Shakespeare

"…And Time will have his fancy
To-morrow or to-day.
--(As I Walked Out One Evening, W.H. Auden)

"…the little actor cons another part;
Filling from time to time his 'humorous stage'
With all the Persons, down to palsied Age,
That Life brings with her in her equipage;
As if his whole vocation
Were endless imitation."

-- Intimations of Immortality, William Wordsworth

"Extraordinary -- another day of DIVERGENCE with the DJIA down and Transports up. This makes 11 out of 31 trading days of 2011 with divergent action. Never seen anything quite like it. Indications of confusion and distribution."
-Richard Russell

"There is a tendency to assume if it didn't happen today, it's not going to happen."
--Barack Obama

Many momentum names got a black eye on Tuesday. Names include F5 Networks (FFIV), VMWare (VMW), Fossil (FOSL), and all the agricultural names (CF Industries (CF) and Monsanto (MON) for example). (Click link for chart.)

Follow-through on Wednesday could be a bloody nose for stocks: A 10-minute chart of the SPY for February shows the breakaway gap from the level of a 100% advance up from the March '09 low. The 10-minute pattern for the month of February shows a gap up to begin the month from what translates to the 1296 level or 36 squared (6 x 6 x 6 x 6). Often culmination moves result in an "overthrow" of a channel (which is the case of the weekly S&P as shown in yesterday's chart) and often these overthrows are 90 degrees in price. It is 90 degrees in price from 1296 to 1333. The move below the November 741 S&P crash low to the 666 March '09 low was basically a 270 degree undercut. Remember that the move that undercut 741 was short being only two to three weeks in time. So it conforms to the idea of an undercut in terms of time and time is more important than price.

Has the market carved out the mother of all backtests? The S&P closing monthly low for the first leg down which ended in March 2008 was 1322.69. That low led to a rally to 1440.25. When the 1322 pivot low from March 2008 was snapped, it was writing on the wall that the waterfall decline was coming; the market had sprung a leak.

Is the S&P revisiting the scene of the crime? The geometry of that 2008 pivot is proved by the ensuing decline of 50% from that pivot. The same geometry is evident from the 2000 high to the 2002 low. This is the poetry of the 100% Rule in motion.

The next decline and the ensuing rally will tell us much about the position of the market and whether the move up from March 2009 was the beginning of a new bull market, and whether a corrective move must be bought or whether this is a big-picture bearish backtest in the spirit of the five-year rally from July 1932 to March 1937.

There is an interesting fractal of the rally of the period from 1932 to 1937 and that of 2009 to 2011.

While the current rally is a 100% advance from the low in approximately 720 degrees of time, the rally from a price of 40 on the Dow Jones Industrial Average in 1932 to 190 in 1937 represented a rally to 50% of the 380 DJIA high in 1929 in 1800 degrees of time. Kind of mirror-image, fold-back symmetry at play.

Note: It should read "April" not "Gapfill" above 2010 on this chart

While the duration of the move from July 1932 smash low to March 1937 is obviously more than twice as long as the current advance off the March 2009 smash low, there is a compelling symmetry to the DNA of the rallies.

If you take the March '09 low for the July 1932 low then the July '09 pivot low mirrors the first-quarter pullback low in 1933. The mid-1933 high resembles the January 2010 peak. The late 1933 low ties to the February 2010 pivot low. The first-quarter high in 1934 mirrors the April peak in 2010. The late 1934 low is a fractal of the inverse head-and-shoulders pattern in the summer of 2010. Following the late 1934 low, the DJIA traced out a five-wave extension.

Currently, a five-wave extension can be counted from the July 2010 low. Assuming this analogue continues to play out, the expectation would be to see a correction followed by a grinding rally back up to the end of April/early May to coincide with the one-year anniversary of the important April 26, 2010 peak.

In other words, an initial top could play out followed by a test into May in keeping with the pattern of the July/October 2007 tops. If the pattern plays out, it remains to be seen if the test will be a new high (toward 1360ish say). This, of course, assumes that there will never be another correction of more than a few days and a few percent in the stock market. But if the scenario plays out, the second half of the year could echo the 30% correction in the second half of 1937. If a deep correction does occur, the next question will be whether it marks a buying opportunity or whether cycles exert downside pressure for a period of five years or so as was the case from the 1937 top into 1942.

Conclusion: Mid-February is opposite, the initial top of 1555 on the Gann Square of 9 Chart. So, 1555 is an important "vibration." This is proven out by the fact that November 21 (the important low in 2008) is square of 90 degrees from 1555. That means that mid-February by definition is 90 degrees and resonates off November 21. To give you an idea of the efficacy of the harmonics, one example is that 739 ties to October 10. The November 2008 came in at 741.

October 10, of course, is the low in 2002 and the high in 2007, 60 months apart, just as the 1932 low and the 1937 high were roughly 60 months apart. If the market is following out the "section" from 1937 tying to 2007, then it is interesting that there was a March low in 1939 and a waterfall crash in May of 1940 mimicking the flash crash in May 2010. 60 months….60 years.

After that, there was a peak in early January 1941 which accelerated into the first week of March. Is it possible the market will play catch-up with pressure into the two-year anniversary of the low? A peak failed to develop in the first week of January 2011, despite the major harmonic of the first week of January being 666 calendar days from March 6, 2009. In fact, that peak marked a corrective phase to May followed by a bear market rally into late July. It is worth watching these time pivots this year in case the cycles have inverted.

Strategy: Many of the go-go names got hit yesterday. Finisar Corp (FNSR) followed through from a Lizard Sell signal left on Friday. Haynes International (HAYN) left train tracks on Monday/Tuesday. Fossil saw the largest sell-off in at least seven months. Either it was a one-day head-fake and a one-day shakeout with a big rally in these names today or it was the sign of the beginning of the correction. The first hour in the go-go names, the ags and the clouds, will be important to watch today. The SPY is perched on important short-term support. Pressure today would trigger a short-term Rule of 4 Sell Signal which is a break of a three-point rising trend line (or declining trend line in the case of a buy signal) as shown in a chart of the SPY from last night's report.

The S&P lifted out of a Plus One/Minus Two Buy set up on February 11. The low for February 10, the low of the setup, was 1311.75. A break of this last little buy signal and inflection point should confirm a correction has begun. Follow-on weakness today suggests lower strikes; 1310 (131 SPY) will be tested for options expiration.

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