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Is a Waterfall Decline Setting Up?

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JEFF COOPER'S MARKET OUTLOOK
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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.


Despite the Fed’s aggressive inflating of the money supply, the metals remain water logged.

Yesterday, the Gold/Silver/GDX complex got whacked on the back of a bearish call from Socgen.

Is the firm acting as ‘someone’s watering boy? It certainly feels like the metals were ambushed to start the new quarter. If someone wanted to dump the metals/GDX you would have thought they’d have wanted these ‘non-performers’ off their books BEFORE the end of the first quarter.

Moreover, Socgens call on gold isn’t just bearish, it’s a table-pounding call on the “end of the gold era”.

Two things:

1) The high was 18 months ago. Seems to me that would have been the time to warn investors they were lugging around a ‘dead money’ investment. That said, assuming the firm is right, better late than never.

2) The call is reminiscent of the ‘Death of Equities’ cover story on Business Week on August 13, 1979, on the cusp of the biggest bull market in history.

Of course, Socgen isn’t BusinessWeek. BusinessWeek doesn’t have an axe to grind.

Has the promise of a low in GDX in March been squandered?

Tomorrow’s report will walk through the answer to that question as seen through the lens of the Wheel of Time & Price.

The geometry of this juncture is compelling.

In addition to the metals complex failing to respond to the Fed’s aggressive inflating of the money supply, the U.S. dollar index has hit its highest level in eight months despite the Fed’s policy.

The dollar remains strong in spite of the Fed monetizing a red sea of debt. Gold fails to respond to the printing.

What gives?

Is the message that deflation is a fact in Europe and that the Fed’s $85 billion a month injections are actually an attempt to bail out Europe in order to prevent deflation from creeping into the U.S as well?

If deflation is what the metals complex is discounting then how do you explain the record highs in the popular indices?

Can the bulls have their cake and eat it too?

The simple answer is that correlation kills.

Just since 2009, gold has gone up while the dollar has gone up and vice versa. Ditto stocks. Remember the mantra that a declining dollar lifted all stocks?

Yet the Mother Of All short Squeezes has been playing out despite a strongly trending dollar since February.

Maybe the dollar’s rise is courtesy of European ‘insider wealth’ who got the early call on the Cyprus Experiment fleeing from the New EZ Confiscation Banking Template.

Be that as it may, one thesis seems off sides here. Either stocks are stretched or GDX/GLD is stretched.

Probably both are due for a reversion to the mean.

The nature of that reversion will be important to observe.

In other words, will a reversion to the mean in stocks see a spring swoon as they’ve become accustomed too or a shallow sell off?

Yesterday, my gnome high in the Appalachians pinged me to say that Tuesday was 14,691 days from the key 1973 high in the DJIA. Yesterday’s DJIA high, 14,684.

Are Time & Price meeting at the Square-out Café?

Dropping a digit and using 1469 shows that this level aligns with March 6 (the 2009 low). So, we have an interesting vibration 40 years from a false breakout (1973) that ties to the 2009 low.

The only way to indentify this time/price relationship is with a unique tool, a Square of 9 Wheel which is sometimes referred to as a Time/Price Calculator. In essence, the theory is that time is not linear but curvilinear and that time and price are equal at important turning points. This is W.D. Gann’s Law of Vibration in action.

If you are interested in owning a Wheel along with a personal consultation showing what I have discovered with this remarkable tool, contact us at cooper@minyanville.com.

While the DJIA and S&P scored new record closing highs on Tuesday (the S&P has still not eclipsed its all time 1576 intraday high), the Dow Transports which led the way higher from November snapped a rising trendline for 2013 yesterday.



Note the Transports show 4 distribution days in the last 8 sessions and are on the verge of testing the 50 dma for the first time this year.

A Head & Shoulders Top on the Transports counts to 5800 which ties to the February swing low.





There is an old aphorism that when the generals (the big caps and the DJIA for example) are leading and the troops (small caps such as the Russell 2000 (RUT)) are not following, the uptrend is suspect. The troops are retreating.

The RUT made high on March 15 and is verging on violating a prior swing high. The RUT has not violated a prior swing high since the uptrend since November began.



Every decline over 8% since the ’09 low occurred on a violation of a prior swing high that failed to act as support.

On Monday, the S&P 600 Small Cap index declined 1.2%. Moreover, the Small Cap 600 also broke down relative to the DJIA.



We’ve been looking for a major high to play out in February/March based on several big picture cycles.

The Small Cap/DJIA chart shows the Head of a Head & Shoulders Top occurred in mid-February followed by a break of a Neckline.

The February 20 top is an interesting pivot since it is opposite August 24, the high in 1987. Last month, we asked whether this is 1987 All Over Again.

The implication is that it sets April up as a potentially interesting month since April is opposite October on the calendar and the crash in 1987 occurred on October 19.

Gann students will recognize that this month is the 49th month from the March 2009 low with 49 (7 squared) beginning the Gann Death Zone.

Remember, this week we showed a chart of the last ditch blow-off into the October 2007 top which was 49 calendar days.

Now we’re looking at 49 MONTHS as a possible blow-off from the March 2009 low.

Is it possible that the market swan dives following a 1st quarter high?

If so the question is whether a first break from a primary high will be followed by a return rally test or whether we already saw the primary high in February.

Interestingly, if you use February 20 as a primary high and presume a nominal false overthrow on our subsequent new highs, the window of Gann Death Zone 49 days later begins on April 1. The brunt of the ‘zone’ would then occur around April 15 or opposite October 19 on the Wheel.

If accelerated momentum to the downside picks up, it may just be an air pocket, but with the world of Wall Street expecting any correction to be shallow, we could see a waterfall.

Conclusion. If the RUT breaks below the key 932 level, the bears will be in a strong position. Remember, this 932 level is key because it is 6 squares up from the 2009 low on the RUT at 342/343. Of course, 932 was also the February swing high further underscoring the importance of the February cycle high. The implication of an authoritative break back below 932 is that the move above 932 in March was a nominal big picture overthrow following a 4-year advance courtesy of quarter-end window dressing.

The high for the year on the RUT is 954. A 90 degree decline equates with 924 which ties to the 50 dma.

This coincides with a trendline for the year.

Strategy. Trade below 932 suggests a test of the 50 dma.

Due to this year’s momentum, the Street will likely be looking to buy the first pullback to the 50.

The presumption is that the market would bounce of the first test of the 50 dma in a while. If so, this would create a 3-point trendline. Moreover, a flush out to the 50 dma from here looks like it would mirror the late February decline.

This is exactly what occurred in 1987 when a fall decline mimicked a spring decline. Until it didn’t.

If the RUT carves out a 3-point trendline and tries to rally followed by an ensuing violation of this trendline it would trigger a Rule of 4 Sell signal which could lead to a waterfall decline.

Form Reading Section

Yesterday morning just after the open, we sent an alert with a daily Netflix (NFLX) showing a Triangle Pendulum sell setup.



Following a pop-up opening, a textbook “Whoops” sell setup played out when NFLX turned red.



Note that the easy part of the NFLX trade followed a TEST. The best short, intraday or on the dailies, often comes after a test failure.

The Principle of Measured Moves does a good job of identifying entries an exits on all time frames.

Yesterday, we sent out an intraday alert suggesting Marathon Pete (MPC) looked shortable based on an intraday Bear Flag.



Note that Tuesday’s large range decline in MPC followed a failed Holy Grail buy setup from Monday---a ‘tail’ at the 20 dma.

Fast moves come from failed patterns.

POSITION:  Position in SDS, NFLX.

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