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Like a Rolling Stock

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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.

Aw, you’ve gone to the finest school all right, Miss Lonely,
But you know you only used to get ‘juiced’ in it.

-Like A Rolling Stone (Bob Dylan)

On Monday, the S&P 500 (^GSPC) carved out an N/R 7 day. This is the narrowest range in 7 days. The contraction typically signals an expansion of range and a pickup in volatility over the next few sessions.

This week is the last Fed day of the year. The typical practice has been for a sell program the day before to drive the market down, and then on the announcement the program is taken off in order to stabilize the market. Therefore, the last FOMC Cha Cha of the year may be one for the books. Despite the fact that many players seem to be sitting on their hands in front of the fiscal cliff, many  funds are underperforming the benchmark and may be forced into the market for year-end on a continuation of the rally. Amid this backdrop is the crosscurrent of capital gains tax-selling to beat higher rates next year.

In addition, Monday marked a small change in the McClellan Oscillator for the fourth consecutive day. This also suggests a sharp move just ahead in either direction.

Since the S&P has been coiling into the apex of a triangle defined by a declining trendline from its November pivot high and its late November low, this also underscores the idea of a sharp move one way or the other.

Adding to the indecision pattern is the possibility that on its dailies, the S&P has traced out an Inverse Head & Shoulders bottoming pattern (bullish), while on the weeklies there is a possible Head & Shoulders topping pattern counting from a left shoulder in April.

As the above daily S&P shows, the last narrow-range day scored by the S&P preceded the large range December 3 reversal day. This has been the high for the month at 1423.73.

Since November 29 when the S&P first flirted with a backtest of the key 1421 level, this pivotal level (which is 1 rev of 360 degrees down from the all-time 1576 high) has thwarted the market's advance: 1421 has held the S&P in check for seven trading sessions.

If the S&P turns down on Tuesday from resistance as is often (but not always) the case the day prior to a Fed announcement, it should find staunch support near 1409 which ties to a rising trendline connecting the 11/28 and 12/5 pullback lows. This coincides with a pullback to the mid-point of the entire September to November decline.

If so, this would leave a potentially bullish 3rd higher low on the dailies since the mid-November low.

Powerful moves are aften derived from 3rd higher lows (or alternatively 3rd lower highs). A decline to the lower rail of the triangle could pull the rubber band back for a turn up with authority through the 50 dma on the S&P. This would coincide with a possible strong recapture of the key 1421 level, suggesting continuation with the S&P being magnetized to a turn up of its Monthly Swing Chart.

This would occur on a move over the November high of 1434.37. Obviously, the Monthly Swing Chart is pointing down following the break of the October low at 1403.28.

A turn up of the monthlies in December would occur on trade 1 tick above the high of the month of November.

The important thing to understand is that it is not the turn up itself that is necessarily bullish, but the ENSUING PRICE BEHAVIOR.

Note that just above this 1434 level where the monthly could turn up is an important declining trendline connecting the high of the year with the early October pivot high. I believe this is quite an important trendline as the early October signal reversal bar ties to the 5th anniversary of the all-time early October 2007 high.

If the Monthly Swing Chart on the S&P turns up and the index behaves bullishly, I think the implication is that the Inverse Head & Shoulders is on the clock and will play out.

The projection of the Inverse H&S counts to 1500-1503.

While a breakout to a nominal new high above this year’s 1474 recovery high is ‘ostensibly’ bullish, I would warn that it rhymes with the cycles/patterns from the false breakouts in 1973 and 1976.

In the last report, I walked through my forecast for the next few years, pointing out the significance of a pivot in the first quarter of 2013.

There are many ways to use the Square of 9 Wheel in converting time to price and vice versa. Most of those familiar with the Wheel stick to the number grid in the center as price and the dates around the number grid as time.

Interestingly, I can’t help but note that the digits 1973 and 1976 vector/vibrate off mid-February.

Mid-February is of course, 90 degrees in time from the mid-November low. If the market holds up or even rallies strongly to perhaps even a nominal new high to 1500, this timeframe could mark an important top.

A breakout with a high 3 to 4 months from a primary high (the September 2012 high) would also rhyme with the false breakout in October 2007 above the primary high in July 2007.

Moreover, while a breakout and a rally phase to a nominal new high would create substantial bullish sentiment for the outlook for 2013, it is worth considering that a move to 1500 could merely be the culmination of a bearish A B C corrective rally.

In other words, the first leg up, an A leg, would be the rally from 1343 to 1423 for 80 points with another measured move of 80 points tacked onto a 1421 breakout pivot projecting to 1500-ish.

The perception of some kind of grand deal where Thelma & Louise steer their Chevy from going over the levy at the last minute preventing the music from dying could drive a breakout.

But the song remains the same as long as the American Pie of spending is not sliced and I fear any breakout to a new high, if it happens, will be a Bull Trap and the real cliff.

Drilling down to the short-term picture, we see that a 10 minute S&P shows 3 drives to a possible high since the December 5 swing low. The S&P is perched just above a little rising trendline which if broken would trigger a small Rule of 4 sell (a break of a 3-point trendline).

So, trade with authority below Monday’s low should see a down session taking the S&P to 1409. If 1409 is snapped, there is good support between 1396 and 1386 in the extreme which represent a test of the 20 dma and the 200 dma, respectively. IF a selloff is triggered with the S&P declining below 1409, a slingshot back up above 1409 would be an indication of a flush-out probably pointing to a catapult higher.

Conclusion. Monday was more of the same with the bulls putting on small placement holder longs to ‘protect the baby’ and sellers offering at resistance.

While the trend appears to be up in the near term, there is no leadership and clearly there are sellers around.

Apple (AAPL) probably remains key if a breakout is going to play out and yesterday, AAPL once again tested the high of the low bar day from November 16. The first test was last Thursday, leaving a large Bottoming Tail (bullish). Will a second test lead to a second move above the 20 dma?

Will the second mouse get the cheese for the AAPL bulls?

AAPL has satisfied our projection for a quick round trip from 595 back to its lows forecast at the end of November.

Now, is it possible that capital gains tax selling has washed the stock out for the time being?

A second move recapturing its overhead 20 dma now closely coincides with a declining trendline from high.

A breakout above this declining trendline could tie to a breakout in the S&P above 1421 and then 1434 on the way to a nominal new high over coming weeks.

Key stocks for guidance here look like McDonald's (MCD), which has rallied up strongly off its lows but reversed on Monday following a squeeze over its 50 dma.

Caterpillar (CAT) is still key and has rallied off the floor and may have traced out a little Inverse Head & Shoulders targeting its overhead 200 dma.

Many of the biotechs such as Amgen (AMGN) (which subscribers have a long swing position in), Celgene (CELG), and Biogen Idec (BIIB) broke out on Monday
POSITION:  No positions in stocks mentioned.