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Crash Test Dummies?

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Once there was this kid who
Got into an accident and couldn’t come to school
But when he finally came back
His hair had turned from black into bright white

-Mmm Mmm Mmm Mmm (Crash Test Dummies)

At the moment, pattern and price have given indications of an important turn at the same time we have overbought conditions and sentiment is frothy.

Yesterday, a subtle change in character occurred. Most of the action during January has been marked by some early weakness or what I call bleedback into the prior day’s range with a strong close. Yesterday we saw a strong open followed by weakness and although the cash marched back towards the opening range, the pattern is bearish, in the spirit of a 1 2 3 swing to a test of session highs.

The futures made new recovery highs in the early going. Cash did not. In addition, while the S&P Spyder (NYSE:SPY) made a new recovery high, the S&P 500 (INDEXSP:.INX) cash did not.

More important than the indications of price and pattern are those of time. There are many cycles and square-outs due since mid-January.

There are more clusters of  indications of a turning point in this time frame than there were at the 2007 top or the 2000 top in my work.

The presumption is when dealing with square-outs that it is the ‘week of’, the weekly time frame where the turn can occur.

When dealing with big cycles, such as the 40-year cycle, I think it is fair to look at the entire month -- in this case the month of January.

In addition to the previous indications for a turning point of some significance that we’ve walked through in this space, the 910 point S&P range of the 2007 to 2009 bear market squares January 12. In other words, 910 is 90 degrees square January 12. In a sense, it is pointing directly at the 40-year cycle which saw a false breakout high that culminated on January 11, 1973.

In addition, the calendar day count of the 2007 to 2009 bear was 512 days. 512 ties to January 19.

512 aligns with 1494 on the Wheel which was the lower lip of our target window. Perhaps trade with authority back below 1494 will be an indication that 'the bird is out the window’.

Yesterday, we took a diagonal bisecting the 666/667 price low on the S&P.

Interestingly, vectoring 512 (noted above) ties to 1569 opposite on the Wheel which is just a few points from the all-time high.

But wait, there’s more. The last day of January will be 1939 days from the October 11, 2007 peak.

On the Square of 9 Wheel, 1939 is 90 degrees square January 31. This looks like a major square-out of the October 2007 major top.

That’s one of the things that’s so fascinating about the Wheel: in my experience as you get closer to a turning point, the relationships seem to crystallize (square?) and come more and more into focus as if revealing themselves the more the Wheel is contemplated/meditated. If you don’t have a Wheel, you can’t see this relationship between January 31, 2013 with October 11, 2007. It’s compelling.

From the March 6, 2009 low to yesterday, January 28 ,2013 is 1424 calendar days.

January 28/29 conjuncts/aligns with 1424.

What are the odds?

In my experience, the harder the market or a stock runs up (or down) into a potential square-out AND the larger the cluster of relationships, the more significant the potential square-out.

It’s as if the market is being magnetized to some inexorable, inexplicable date with destiny. Something that satisfies and satiates Mr. Price and Mr. Time. The bigger the pull, the bigger the turn.

In these cases, it’s as if the pedal is to the medal and over-exuberant bulls become crash-test dummies into a buying climax. The wall of worry becomes a brick wall.

Yesterday we saw signs of frenzy reverse on a dime, as a few ‘cars’ hit the wall so to speak.

Leaders like 3D Systems (NYSE:DDD), which we flagged in this space late last week, gave a Gap ‘N Go to the downside.

Amazon (Nasdaq:AMZN) reversed after gapping to the lower lip of our projection window shown in yesterday’s report.

This morning we have Polaris Industries (NYSE:PII) and VMWare (NYSE:VMW). Note that VMW is plunging following a breakout above its 200 day moving average and was in a conspicuously strong position but that this morning’s gap is set to demolish all the upside work since late October in one fell swoop.

When you see this kind of Gapism, bulls draw in their horns and may become disabused from chasing and become more concerned about protecting profits. They lighten up. Bears become emboldened and look for the next accident around the corner.

Conclusion. Given the strength of the run up, the presumption is that any decline will see a return rally. That said, theoretically, the market owes us nothing from here.

One could make a case that the September high was the primary high and that the current nominal new high rhymes with the October 2007 overthrow of the July 2007 primary high.

A weekly S&P from January 2011, two cycles ago, shows the Head & Shoulders top at that time and the crash that followed. The market gave a graceful exit then accompanied by multiple tests and a distribution top. Things may not be quite so graceful this time around. I just don’t know.

Once the S&P recaptured the right shoulder of that pattern, it was presumed to be in a strong position.

However, note how a trendline connects the right shoulder from 2011 with the April 2012 top, the September 2012 top, and current levels.

This is an indication that not only is time pointing to a change in trend but that price is validating the indications being given by time.

Conclusion. The market is due a pullback and if I had a hundred dollars (inflation) for every time someone in the financial media will say today/tomorrow that a pullback here is HEALTHLY, I wouldn’t need to trade.

That said, the normal expectation would be for a pullback that tests prior highs in the 1460-1470 range and then for a return rally that tests/exceeds the highs somewhat.

But you never know if the S&P will mimic the Gapism out there in several names we’re getting.

The idealized date for a return rally following a pullback (if indeed one plays out) would be mid-February which is 90 degrees in time from the mid-November low.

If a pullback of substance fails to play out and futher momentum shows up above 1500 S&P, 1549 ties to the end of February. Why 1549? Well, the undercut low of the November 2008 741 low into the March 2009 low of 666 was 75 points. A similar 75 point overthrow of last September’s 1474 high gives 1549.

The end of February obviously is close enough to the first week of March (where the low occurred) for government work.

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Editor's Note: This report 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.
POSITION:  No positions in stocks mentioned.