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The Last Resort

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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.

When you’re on a golden sea
You don’t need no memory
Just a place to call your own
As we drift into the zone

-Island in the Sun (Weezer)

According to a report from Bloomberg dated April 25, 2013, “Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities.”

One of the reasons for the last crisis was that banks became speculators with depositors' money rather than fiduciary holders of depositor money.

Now call it whatever you will, but Central Banks are trading.

Are they trading against you and me? Are they in cahoots with each other, sometimes called collusion?

I mean they don’t just coordinate policy in a vacuum, right?

And we’re not talking about their respective craniums.

The report continues, “The survey of 60 central bankers, overseeing a combined $6.7 trillion, found that low bond returns had prompted almost half to take on more risk. Fourteen said they had already invested in equities or would do so within five years. Those conducting the annual poll HAD NEVER BEFORE ASKED THAT QUESTION.” (Emphasis mine)

So the ‘investor’ of last resort is piling into equities, the last asset class standing.

The investor of last resort is piling into risk assets:

“I definitely see other central banks doing or considering equities”, said Jan Schmidt, the executive director of risk management at the Czech National Bank in Prague, which has built up stocks to 10% of its $44.4 billion in reserves since 2008. Even so, the risks of owning stocks are the same as ever, he said in e-mailed comments.

This explains why the market feels manipulated

I can’t help but think that when everyone goes to take risk off the table that there will be no table.

What happens when these central banks who are all smoking the same stuff decide to ‘take a little off the table’ at the same time?

Is this why Ben isn’t going to Jackson Hole this year?

Or is it because of “scheduling conflicts”?

Bernanke missing Jackson Hole is like Keith Richards missing a bong hit.

So the guardians of the value of our currencies (who have done such a great job in that regard), are going to set the equity markets right?

I can’t help wonder if Mr. Cycle will truly be diverted from his appointed rounds forever.

When he returns, it may be with a vengeance with a knock at the door heard 'round the world.

Already, I heard two stories yesterday about real estate outside of San Francisco.

Apparently, wealthy Chinese investors are paying 25% over the listing price for houses, sight unseen.

A friend of mine pinged me that the home he was selling just closed and appreciated $400,000 WHILE IN ESCROW (something he will not participate in).

Another friend told me about his wife who is a real estate agent in Northern California who has lost 10 sales because her clients are not bidding enough over the listing price, and that there are multiple buyers for every listing.

They’re baaaack. The poltergeists of policy have succeeded in creating Bubble 3 it seems.

At the same time the Dow Jones Industrial Average (INDEXDJX:.DJI) has turned its 3 Day Chart back up. Remember that in the slide off the April 11, high, the 3 Day Chart on the DJIA turned down for the first time in 2013.

Simply put, if April 11 marked an important peak, then this turn up in the 3 Day Chart should define another high soon in terms of both time and price.

Is it possible the turn up is defining a right shoulder of a Head and Shoulders top?

Even if a bullish A B C correction is going to play out, clearly the pattern suggests the potential for a test of the lower rail of a rising channel at around 14,4000.

Many of the stocks that just made highs such as the Biotechs backed off with authority yesterday while many broken names like the energies snapped back with vigor.

The combined effect suggests resistance as the energies bounce back into congestion as reflected by the Energy ETF (NYSEARCA:XLE).

The XLE may have a bit higher to go assuming this is a bearish backtest but it has satisfied Gapfill and could carve out a bearish 3rd lower high at any time.

As you know, fast declines often times play out from 3rd lower highs.

So it is possible that a bounce back in the names just coming off their highs (like the Gilead (NASDAQ:GILD) short we flagged in Tuesday night’s report) may rebound and combine for a point count to a nominal new high in the S&P (INDEXSP:.INX). The Biotech ETF (NYSEARCA:IBB) seemingly reversed right on cue following a test of a confluence of Live Angles as shown in Tuesday’s report.

With that in mind, if there is a buy program in the wings, we are 1610 days now from the major November 21, 2008 major low.

While it looks like the 3 amigos, Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), and IBM (NYSE:IBM), have been used the last 3 days to rally the indices and that they may be unwound, the S&P has recaptured 50% of the recent decline, indicating it may want to satisfy a print over 1600.

Conclusion. If April 11 marked a peak, then the S&P  should be on the brink of a wave 3 decline to below 1530 toward 1518.

1518 represents a 180 degree decline from the 1597 high.

Note the picture-perfect backtest of a broken channel for 2013. At the same time, the S&P is testing the large-range Boomerang sell signal/distribution day from Monday, April 15.

Strategy. If the S&P breaks Wednesday’s low, theoretically we should see a large down day today.

However, there are also month-end considerations at play. If the market simply drifts and holds higher today, then ‘they’ probably have something in their pocket for Friday and month-end so save your powder.
POSITION:  No positions in stocks mentioned.