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April Flowers Will Bring May Showers

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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.

It’s a sad day when a central bank really wants inflation and can’t make it happen.

-Jim Rickards

Sure it’s supposed to be the other way around, but the markets have a way of turning things on their head. Like a Logic Piñata.

The old aphorism is that the markets always do what they’re supposed to -- but never when.

This week I heard an astute money manager who was correct on the gold short trying to buttress his argument for STAYING short by saying that despite all the central bank money, gold failed to respond and that thesis remains intact and so if it goes higher they will just short more.

Two things:

1) The market doesn’t always adhere to a macro thesis. It has a mind of its own. When they do decide to adhere, it’s on the market's own internal clock.

2) There’s trading and then there are macro themes and you shouldn’t confuse the two: often the twain don’t meet. Just because gold did not respond to a new round of global currency debasement doesn’t mean it will not respond in the future.

Interestingly, after presenting the macro argument for being bearish on gold at the time of its crash, the above manager now goes on to rationalize his remaining bearish position by saying that gold is a ‘psychological’ trade and that the underlying fundamentals aren’t important.

In my experience, one of the most dangerous strategies is to short retracements following a selling climax (and vice versa, buying pullbacks following a buying climax). The conceptually correct stance is to short retracements in a persistent downtrend and to buy pullbacks in a persistent uptrend; however, after selling or buying washouts, this strategy is dangerous to your financial health.

Currently, Gold (NYSEARCA:GLD) shows 2 narrow range inside days following a huge rebound off what we’d been labeling a selling climax. This backtest of the overhead 20 dma sets up a textbook Holy Grail short setup.



If the interim trend has turned back up, GLD will probably react from this test of the 20 dma leaving, 2 consecutive lower daily lows and carving out a Plus One/Minus Two buy setup on the dailies.

The subsequent behavior if this plays out will tell us a lot about the short-term position of gold.

The big-picture trend should turn back up on:

1) GLD recapturing the lower rail of the recent declining channel.

2) Offsetting the recent breakaway gap to the downside.

3) Recapturing the horizontal breakdown level.

GLD has filled the first gap coincident with a test of the 20 dma. The presumption is the gold bears are laying out shorts or adding to shorts here if they are inclined to do so at all. If GLD doesn’t accommodate them, they may get squeezed  the same way the gold bulls did in the crash.

Interestingly, the dollar looks like it's rolling over on its dailies, stabbing below its 50 dma with authority. Could this be a catalyst for gold/GLD to continue its rebound or breakout?



A weekly dollar shows a potentially quite bullish setup of a big picture Cup & Handle.



However, if the handle fails, it could be a point of recognition which ignites gold. That said, what if the so-called ‘macro picture’ correlation evaporates and the dollar turns back up in tandem with gold rallying? The ‘thesis’ boyz should cover quickly, right? Theoretically, they should go long as well, but they probably won’t in jeopardy of being called ‘gold bugs’. Remember, "this is a psychological trade?" Arguably, the markets are always a psychological game from a trading basis -- not so much so if you are dollar-cost averaging as an investor.

The backdrop for the recent plunge in gold and a potential bullish resolution on trade that recaptures the breakdown level is depicted in the 14 year cycle.





There is a defined 14-year vibration in gold due to resolve in 2013.

From the closing of the gold window in 1971 plus 14 years gives a big pivot low in 1985.

Another 14 years defined the major bear market low in 1999.

Another 14 years forward is 2013. I don’t think gold just made a major high. The likelihood is that the biggest crash in gold in 30 years is an indication of the trough of a 14-year cycle low.

Turnng to the stock market, as we showed with the recent Apple (NASDAQ:AAPL) charts over the last few days, major pivots often are seen at the beginning/end of months and the beginning/end of quarters.

Yesterday was month-end, and year-end for some big funds. Once again we saw Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT) run up the flagpole for what looked like a month-end markup.

We should yet see a program that satisfies a 1600 S&P (INDEXSP:.INX) print. May 1 vibrates off 1604 on the Square of 9 Wheel and we could see 1615-20 in the extreme as we are that many days from the November 21, 2008 low around the world. Next week is also a solar eclipse which often ties to increased volatility and market events.

I would watch out for a possible Spike & Reversal pattern above and then back below 1600 on any Fed statement today. It is possible we see a gonzo FOMC Cha Cha Day.

Form Reading Section



Note the textbook 1 2 3/180 buy setup on the dailies below on the pullback to the 20 dma.



POSITION:  No positions in stocks mentioned.

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