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False Moves Lead to Fast Moves: Market Set for Sea Change

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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.

Here I am again in this mean old town
And you’re so far away from me

-So Far Away (Mark Knopfler)

An ideal buy point for Tuesday on a trading basis would have been a down open.

As you know, and as noted in an alert just after Tuesday’s open, up opens following real distribution days are seldom the stuff of upside reversals.

So yesterday’s rally was suspect, despite closing at/near session highs.

An ideal sell point/short point for today would have been an up open/first hour high -- unless they gap down big which is what we’re going to get (which was a 50/50 probability). Why? A measured move projects to 1450-1460, which we will show in tomorrow’s report.

The market is not accommodating. That’s not its nature, whether by default or design.

Yesterday’s lesson/story was never to underestimate the power of the bulls to take off their hedging shorts and institute a market-on-close buy program.

The bulls/long institutions are reluctant to sell their portfolios and instead sell futures for hedges and on days like Tuesday, they take them off.

Today’s lesson/story looks like this is where the bulls learn there has likely been a sea change and this is not a mere 1 to 3 day dip.

Trade back below 156 SPY (NYSEARCA:SPY) and especially 155 should start another waterfall.

With this morning’s gap down, the longs will be forced to put their hedges right back on ‘in the hole’. They may wait to see what a first bounce looks like, but if the market is still weak after the first hour, and rolls over following a first bounce, they should pull the trigger, putting selling pressure on stocks again.

As the above SPY chart shows, a 50% retrace of Monday’s decline gives 156.60. A 50% retrace from Friday’s close, giving a true range (due to Monday’s gap), is 156.95. However, 50% of the entire swing down from last week’s high is 157.40.

The SPY was magnetized directly to a close of 157.40 yesterday. In the process, note the bearish 1 2 3 Swing Snapback to a test of resistance -- in this case, the resistance proved to be Monday’s ORB (opening range breakdown) where accelerated momentum developed.

The bears were salivating waiting for the chance to claw the market on Gapfill above 158, which looked like a good assumption while overnight longs were probably poised to sell into Gapfill and ask questions later -- the market doesn’t exist to accommodate.

So, despite Monday’s break of a major 3-point trendline from the November low and with the presumption that the S&P was headed for a test of its 50 day moving average for the first time this year AND with the odds high that the 3-DAY chart would turn down on Tuesday, the market did the improbable: it rallied sharply.

There was a strong likelihood that the 3 Day Chart would turn down on Tuesday with the DJIA (INDEXDJX:.DJI) and S&P (INDEXSP:.INX) carving out 3 consecutive lower lows because:

1) This hasn’t occurred all year

2) The indices closed at/near session lows on Monday

Remember that this is the longest stretch since 1930 where the 3-Day Chart has remained pointing up.

Now, it’s due to turn down and it would occur only from 3 consecutive lower lows on the dailies. If the first hour is not a low today and the S&P/DJIA remain below their respective first hour lows, the likelihood is that the next 3 days will score lower lows, turning the 3-Day Chart down on Friday in front of the weekend.

Since bulls typically keep their hands in their pockets on weak Fridays, is it possible we get a Gonzo Friday?

As shown in yesterday’s report, the S&P should be headed to 1530-32 and then 1500. Remember that the number of days from the March 2009 low to the end of this week ties to around 1505.

So if the wheels come off here, this level could be seen quickly in the same way that the number of days from the November 21, 2008 crash low to late last week was 1602. This time/price square-out virtually defined the high print of 1597 (so far).

Conclusion. All the King’s Ben and all the bulls' horses brought the S&P back from the brink on Tuesday. However, fast moves often times come from failed moves and failed patterns. What happens if Turnaround Tuesday was a failed reversal? What do the bulls do for an encore, besides panicking?

Yesterday, big caps like Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) were used to jack the S&P higher, if the strong stocks from yesterday are weak today and go right back in the tank, it’s quite a bearish tell which probably indicates a resumption of Monday’s waterfall.

If April 11 remains intact as a high and the S&P continues to carve out lower highs going forward, the so-called Gann Death Zone ties to the end of May/first week of June. What is interesting is that the first week of June vibrates off 666 (the 2009 low) and that the recent high satisfied SEVEN squares up (1584) from that 666 low. Remember that Gann keyed on 7 as the number of reversal and panic, with the end of May being 7 squared days from April 11.

Strategy. This week is key because it may be the point of recognition where the bulls realize there has been a sea change. They may have used their get out of jail cards.

If the infamous M A Topping pattern shown in yesterday’s report remains intact and the S&P violates the feet of the ‘M’, I would not underestimate the idea of a decline to 1450-1460 and the 200 dma. An authoritative break of the 50 dma, especially on the important Friday weekly closing basis will be the lynchpin underscoring a sea change.

In addition, a close at near the low of the week will install weekly Train Tracks, which imply at least a 5 to 10% correction.

We have pilot positions in both the ProShares UltraShort Russell 2000 (NYSEARCA:TWM) and ProShares UltraShort S&P500 (NYSEARCA:SDS). I would look to fill those positions on any bounce this morning, and if applicable, will send an alert.

Form Reading Section

Amgen (NASDAQ:AMGN) is a runaway name set to continue today and is worth keeping on the radar as a tell.

Ditto GOOG, whose chart we showed yesterday which scored another backtest of key resistance.

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:  Position in SDS,TWM