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Let Them Eat Cannoli?

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TECHNICAL ANALYSIS
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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.

Doctor please, some more of these
Outside the door, she took four more
What a drag it is getting old

-Mother’s Little Helper (The Rolling Stones)

Sentiment is very bearish and there has been so much arbitrage at the 1400 level that you would think enough portfolio insurance has been bought to allow for a rally.

Perhaps ECB President Mario Draghi's long-awaited news conference an hour before the open today will allow money managers to change their view on the market.

Bank of America (BAC) has a sentiment indicator that is flashing its biggest buy signal since 1985. Interestingly, it is a signal that flashed bullish at the top in May which preceded a 10% decline.

Is it different this time? Negative sentiment may fuel the bull case, but it is worth remembering that sometimes the crowd is correct. After all, isn’t that what trend following is all about?

Right now it seems the Mother of All Stratagems is “Don’t Fight The Fed”, which has expanded to "Don’t Fight the ECB" in this incarnation.

While a Dow Theory bear signal was flashed in May followed by a plunge, the market has rallied back, in part due to Pavlovian expectations of further Fed stimulation which occurred on the summer declines in 2010 and 2011.

So, did rhetoric front run reality in the summer of 2012?

Put another way, did the bulls front run the reality while the economy continued to sag and unemployment continued to deteriorate.

Has the equity market decoupled from the economy on the notion of unlimited bond buying out of the ECB and Fed?

Is the world going Japanese?

A daily Dow Jones Industrial Average (^DJI) chart for the year shows that the decline from the nominal new high in early May coincident with the Bank of America sentiment signal.



Let’s walk through the pattern preceding the plunge off the May peak.

First, there were 3 little drives to a high in March into April 2, followed by a first break which ‘overbalanced’ the entire move up in the first quarter. The nominal new high in May was a test failure.

The entire pattern currently looks like a fractal of the price action since the Spring with the decline into June possibly mirroring the decline into April 11.

Obviously, the amplitude and duration of the pattern is greater now and you know what they say: the bigger the top, the bigger the drop.

Of course, that assumes that I am correct about a top.

Note that the entire picture suggests the possibility of 3 drives to a high and a triple top carved out on August 21. The first top was the March high. The second top was the May high, with late August potentially being the third high.

The notion that the August 21 signal bar coincided with many major cycles is underscored by the fact that 8 of the following 11 sessions were decliners.

Interestingly, the DJIA shows what may be 3 little drives to the 50 dma while the rally off the July low followed 3 little drives to the 200 dma.

The takeaway is that the initial top on April 2 was followed by the market clawing back for a test 1 month later. Is it possible that the DJIA will crawl back to test the August 21 high one month later into the Autumnal Equinox on September 21?

An hourly S&P Spyder (SPY) chart since August 21 shows multiple lower highs. Trade with authority (in other words, not just a ‘pinocchio’) above 141.50 could signal a spike to test the prior highs.



Recently, we noted the time/price square-out from last October’s low to the end of August at 1407, a level the S&P has been head-butting for 7 sessions.

Today, we are 6 calendar days from August 31. Adding 6 points to 1407 gives us 1413 as a level to watch today. This is where the futes are trading off the idea of Unlimited Pixie Dust from the Ben and Mario Punch & Judy Puppet Show.

Apparently, this is where we get to play Judy and the robots, punch.

Given this 1413 level, I can’t help but wonder if we get an upspike breaking out above the hourly triangle and a reversal back below the bottom of the triangle.

So, let’s be aware of the possibility of a Triangle Pendulum on an ECB Cha Cha.

Is it possible that we get a Mother of Sell on the News before the weekend?

Investors, traders, and robots have all been on hope and hold this summer in a state of suspended animation. When Draghi's ‘whatever it takes’ comes out of the closet, will it be anticlimactic or offer a buying climax?

Even the 10-year yield is coiled:
I can’t help but wonder whether the Fed thinks that nothing less that massive QE will have any effect on the US economy, though I doubt anything massive will come this close to the election. Moreover, I doubt the Fed wants to take this test this close to the election in case it fails and the incumbent is not reelected.

The bottom line is, it looks like any QE is fully baked into the market cake and anything but a massive QE would trigger a sell-off in the averages.

Has the cake been left out in the rain?

Or can we expect dancing girls to pop out and sing Happy Birthday if the DJIA and Dow Transports (^DJT) better their May highs, negating the Dow Theory bear signal?

The wild card is whether Draghi brings a revolver or a bazooka.

Will Draghi’s plan be tantamount to “Let them eat cannoli” again -- a shell of a plan but cream filled with promises?

Tonight, Obama gives his speech at the DNC, and he will be forearmed with Friday’s jobs report.

Are you good at reading body language?

If he doesn’t mention the word ‘jobs’,  my hunch is that the report is going to stink up the joint.

Names of interest today besides those from last night’s stock report include Sturm Ruger (RGR), on which we sent out a long alert. yesterday.



RGR is set for continuation and may have eyes for 50.



Red Hat (RHT) also looks interesting on a pause day following a thrust on Tuesday.

Acme Packet (APKT), which worked well for us recently, also looks interesting, tracing out a flag pattern.
 
POSITION:  Position in QID

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