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Are We About to See the Mother of all Short Squeezes?

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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.

They see you coming they see you go
They know your secrets and you know theirs
This town is crazy…nobody cares

-Lost Cause (Beck)

The volatility spike implied by Wednesday's lunar eclipse at 9:46 and warned about in Tuesday's report played out in spades with an opening plunging low followed by a slingshot higher.

Those funny astrologers in the basement of the Fed!

Yesterday’s report said to get aggressively short on trade below 1390. While the S&P 500 (^GSPC) dipped momentarily below 1390, the SPY held the level perfectly with an authoritative stab back up through the initial Opening Range Breakdown (ORB), signaling higher (A) which in turn left a Reverse ORB back through the first half hour's range.

The SPY extended to Gapfill, testing Tuesday’s lows in the process prior to a first solid pullback (B).

The market could have rolled over from that pullback, but my note to rebuy some Ultrashort S&P 500 (SDS) near that point proved ill-advised as the reversal out of the pullback was decisively bullish, offsetting Tuesday’s lows and signaling a run into the bell for a complete reversal day and an outside up session.

Clearly, the big pivot for the reversal was our Monthly Swing Pivot at 1403. This is where the monthlies last turned down.

Yesterday was the first turndown on the Daily Swing Chart since the mid-November low. This was the first time the S&P traded below a prior day’s low since the rally phase began.

This is how I measure the market -- on the behavior of what it does in TIME -- not just price. In other words, it is a time-based study of how the market reacts and responds as the Wheels of Time, the dailies, weeklies, monthlies, and quarterlies turn up and down.

The behavior following yesterday’s turndown in the Daily Swing Chart was decidedly bullish.

This is my ‘T-D’, ‘first turndown’ or Touch Down setup, the implication being that a slingshot following a first turndown (in a stock or in the indices) indicates the market is set for immediate continuation and a run higher. This is what we’re getting this morning with the futes up a strong 9 points as I write this.

The bulls took the field position back as the S&P approached its 200 dma which was anticipated first support. However, the bulls just didn’t take field position back, they stole the ball and ran an end-run play: the S&P could have held its 200 and sat, but the strong rebound was unequivocal.

Now whether the reversal has the fingerprints of the Fed again as Congress dances naked over the fiscal gulch or whether it is a short-lived short squeeze for month-end portfolio considerations is a question up for grabs, but I don’t want to be short unless the S&P goes back below 1403.

Another tell will come now that the S&P is in the Weekly Minus One/Plus Two sell position. In other words yesterday’s late run above last week’s high carved out two consecutive higher weekly highs satisfying the requirements for the Minus One/Plus Two on the weeklies. Of course, this pattern will be on the clock into the end of the week and month end and a lot of upside can occur between here and there as we’re getting a glimpse of pre-open.

Yesterday’s reversal immediately attacked the 1409 mid-point putting it in a position to attack 1421/1422.

Remember that this is the April high and importantly it is precisely 360 degrees down from the all time 1576 high.

Those of you who have purchased the Square of 9 Wheel will learn in your phone consultation just how to calculate a time cycle and its harmonics using the 1576 all-time high, and converting price to time. (email if you are interested in purchasing one, which includes a personal phone consultation with Jeff Cooper)

Suffice to say that along with the current ‘natural cycles’ of 25, 40, 50, 75, and 100 years dominating the current time frame, the above method of calculating 1576 to time also targets December as a MAJOR pivot based on a turn indicated in December 2017.

Be that as it may, Wednesday’s reversal left the S&P coiled to attack 1421/1422 which ties to the overhead 50 dma.

My takeaway is this: the S&P signaled higher when it eclipsed the April 1422 high. However, the S&P succumbed to the double square-outs at 1460 and 1468.

Those square-outs hitting on many time cycles were powerful enough to quickly send the S&P down by 131 points. Now, recapturing this 1422 level for a SECOND time theoretically puts the S&P in a position to ramp higher, especially on a weekly closing basis above 1422.

There is a band of resistance that runs to as high as 1434, the last swing high, but the indication is that an authoritative move above 1422 opens the window for a move to a new recovery high.

As noted on a recent chart, it could imply a move to as high as the upper rail of a weekly channel to 1600.

That said, the behavior following a 2 to 3 week rally (when the important 3 Week Chart could turn up) going into mid-December, which is an important 90 degrees in time from the mid-September high, will determine a lot about the position of the market and the notion of a run for the roses.

I think it is important to remember that in late 1972, the bears were correct but they were carried out horizontally as the S&P made a new all-time high on a big breakout in January 1973. That big breakout was a fakeout-breakout and was followed by a devastating 2-year bear market. This 40-year cycle may be in play here. While it doesn’t necessarily indicate a new all-time high, continued bullish behavior here, especially past mid-December, could indicate meaningfully higher prices above 1474.

Is it possible a celebratory hurrah rally plays out on a Congress chanting kumbaya? Can the mother of all can kicks lead to the mother of all short squeezes?

Conclusion. The behavior following the first turndown on the Daily Swing Chart was conspicuously bullish. On the NYSE, breadth was positive 2 to 1 with 92 new highs and 27 new lows. At the same time, bonds hold at record highs with no sign of a 'sell bonds to buy stocks' program. In addition, precious metals got whacked. So the correlation boys are also in a quandary as a volatility cocktail stirs and shakes stocks into month-end.

If Mr. Volatility has more tricks up his sleeve, a complete reversal back below 1390 upends the market but I don’t anticipate that right here, right now.

Strategy. An open that tags 1420-1422 may be worth a token short with a tight stop to see what plays out.

An open at this key level also is probably a good level to peel off some longs and see what a probable pullback looks like.

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POSITION:  No positions in stocks mentioned.