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Goldilocks Gets Botox

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JEFF COOPER'S TECHNICAL ANALYSIS
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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.

In a strange game
I saw myself as you knew me
When the change came
And you had a chance to see through me.

-On the Way Home, Neil Young

One report I read over the weekend said, “If you wanted to put together a fake jobs report that would be the most soothing to a frazzled market, it would have read pretty much as just released.”
 
It was neither too hot to cause markets to worry that QE was overheating things nor too cold to suggest that the Fed was flailing and failing in their policies.
 
It was ‘just right’, just what the doctor ordered -- botox delivered right between the frown lines at the lower rail of a rising price channel on the S&P 500 (INDEXSP:.INX) that tied to the 50-day moving average.
 
Perhaps the Fed or ‘someone’ couldn’t afford a bad reaction in stocks?

Perhaps the bulls wanted everyone back in the pool.
 
The market grinned big time on Friday, but can it bear it? Can it mount a successful recapture of the overhead 20 DMA?
 
While the market grinned, can it manage a genuine smile to new highs?
 
It may sound paranoid and conspiratorial to suggest Friday’s numbers were, shall we say, synthetic. It may sound like sour milk from the bear camp, but in this day and age where there is a lot being done in the name of national security, the premise is not completely off the mark.
 
Without getting involved in politics (although everything is political), arguably one has to ask how much of the advance since March ’09, one month after a new administration, is based on ‘national security’?
 
The Japanese government seems to have embarked on a desperate, ‘whatever it takes’ escalation in this fight for national financial security, which is being fought on the currency battlefield.
 
When there are few options left after more than 20 years of stagnation, the financial nuclear option/experiment is being employed.
 
Dire straits invite desperate measures. I say ‘nuclear’ because it may mean the end game of their ability to borrow money at interest rates that are economical. If interest rates on Japanese government bonds rise to over 2.2%, reports show that 80% of tax revenues will go just to pay the interest on their debt. With a 245% debt to GDP ratio, Japan needs inflation and growth.
 
The monetization Kabuki Dance in Japan may be a preview of the song and dance in the US. The song remains essentially the same, but in Japan, it’s like an old vinyl record album being played at a sped-up RPM. The recent pitch of volatility in Japan is largely indecipherable on a trading basis and looks like it has lead to global volatility.
 
And, volatility often precedes major turns. Volatility is often the canary in the mine. And the biggest canary of them all is the currency one. How are global conglomerates able to do business when a currency can move 3% in a day as recently happened in the Yen?
 
Here in the US, it looks like ‘someone’ has figured out how to ‘manufacture’ stock rallies with cheap money courtesy of the Fed, and generate synthetic baskets of stocks using futures and options and ETFs.

It feels like this is what has been driving the market since November. The market doesn’t base anymore. It ‘V’s off levels, and this looks symptomatic of the basket programs/ETFs. The problem is that when everyone owns the same ETF, SPDR S&P 500 ETF (NYSEARCA:SPY) for example, and there is inclination to take profits, everything gets killed across the board. Players must sell or give back their annual or quarterly gains.
 
Essentially, this was the same problem with portfolio insurance in 1987. Everyone believed the market was backstopped by portfolio insurance, but when the market swings on one limb and everyone buys into the same concept, the limb can snap and the trend can be discredited swiftly.
 
It feels like we’ve reached an inflection point where the aphorism that no one is bigger than the market is being tested at the same time that the idea the state is bigger than the people is being tested.
 
I can’t help but feel that the distinction between the Fed and the market has become blurred to the point where they appear almost one in the same. Has the market become the shrine of the state?
 
What exactly was the purpose for double and triple-leveraged ETFs and decimalization-allowing HFT’, and who exactly is driving those clown cars?
 
At the end of May, I received the following note regarding sales of homes in foreclosure by Wells Fargo (NYSE:WFC), JPM Chase (NYSE:JPM), and Citigroup (NYSE:C), as reported by the LA Times from a friend of mine who was very prescient prior to the 1987 collapse and capitalized on it:
This is all part of the massive manipulation that has been occurring over the last four or five years. Remember the saying, 'There is nothing to fear but fear itself.' The Central Banks figured this out early and suppressed risk across all asset classes, and in so doing orchestrated the mother of all short squeezes. The problem now is the can has been kicked, but there is no economic activity to support the propped prices. I still believe the leverage/repos in the long dated global bond markets will rule the roost. No one will want to own anything longer than 10 years (probably 5-7) because the currency risk is too great. As the unwind occurs, and I believe it has started, there will be nothing the central banks can do to arrest it. The leverage is too great and the margin calls will be massive. The real estate market ‘looks good’ because it has been gamed, but few can afford a house, let alone rent one.
Recently, we’ve seen substantial volatility in the markets, ostensibly created by an unwind in the Yen carry trade. If the real danger is the financial system blowing up due to the huge amount of derivatives outstanding, then a rapid rise in rates could be a fuse for an unraveling.
 
Most market participants will tell you the market rallied because of good employment numbers on Friday, but in reality, the futures were up on globex nicely before the numbers were ever released. It looks like the setup was staged from late Thursday when the S&P plunged below 1600 and whiplashed the Street with a 24-handle reversal off the low. While the media and pundits latch on to various cause and effect bromides to explain the daily movements of the market, it looks like the majority of the moves are now arbitrage programs run by a cadre of insiders.
 
The S&P made a well-advertised low at the bottom of a rising channel right at its 50 DMA right on our June 6 turning point day. Remember that June 6 aligns with a price of 666 on the Square of 9 Wheel and is straight across and opposite 1666 (near the closing high) and that June 6 is 90 degrees square March 6, the date of the low in ’09. What is remarkable is the picture-perfect backtest of the breakout from the mini-Cup & Handle from May 2 at 1598.
 

 
What is just as remarkable is that the 89 point S&P decline off the May 21/22 high (which ties to the anniversary of the pre-crash pivot high in 2008) never turned the important 3-Day Chart down. In other words, there have not been 3 consecutive lower lows (intraday) in the entire decline.
 
There have not been three consecutive lower daily lows on the S&P in all of 2013.
 
The 3-Day Chart on the Down Jones Industrial Average (INDEXDJX:.DJI) has not turned down in the current decline off the May high either. However, the 3-Day Chart on the Dow has turned down in 2013. It turned down on April 19, which defined an important low. In upcoming reports this week, we will walk through why that downturn is such a critical point to measure the market.
 
The explosion off Thursday’s low saw the S&P rebound to just shy of its overhead 20 DMA. The 20 DMA is at 1646.28 with Friday’s high being 1644.40.
 
An up-open on Monday would satisfy a kiss of the 20 DMA. A tag of 1647 would represent a 49 handle (7 squared) pop in just hours. As it happens, 1647 is 90 degrees down in price from the May high. A backtest of this 1647 level, 7 squared points from low is an interesting short setup with a stop. As long-time readers know, many  times 7 represents the number of panic, such as in 1907, 1987, and 2007. In addition, the crashes in 1987 and 1929 both began to accelerate on the 49 (7 squared) day from the high.
 
If the Dow and S&P fail to carve out new all-time highs following a breakout above this key 1645-1647 level, the end of the quarter (the end of June) will be important to observe because it ties to 49 days from the May peak. The bulls may be able to keep the indices buoyed up into quarter-end, but if the market begins to see selling pressure in the beginning of the new quarter with a pattern of lower highs, caution is warranted.
 
I wrote in Friday morning’s report, "If Thursday was a good low like the November square-out low, there is a chance for a run up to new highs by as early as mid-July; however, that can only play out if the S&P recaptures 1646-1647 which is 90 degrees down from the 1687 high.”
 
The market was magnetized immediately toward 1646/1647.
 
The hourlies suggest that the potential for a corrective 4 wave rally has played out with another decline directly ahead.
 

 
The S&P did recover 50% of the decline, which is 1642.50-ish but only marginally so. They should make a high in the first hour and then we’ll see what the first pullback looks like.
 
Two months before the primary high in July 2007, I wrote an article also entitled "Goldilocks Gets Botox" where I warned that a breakout over the 2000 highs with the printing presses minting Botox for Goldilocks may not see the great rotation into stocks for which the institutions were set up.
 
While Friday’s employment porridge seemed just right, I can’t help but wonder if the recent breakout to new highs won’t be the third bear since 2000.
 
Conclusion: A weekly channel shows the potential for a move up to 1740-1750. This represents 1 rev of 360 degrees above the 2007 high.  A decline to the bottom of the channel could play out at any time. A 360-degree decline from the recent 1687 high ties to around 1515. However, a break below last weeks low and the 2007 high could put the S&P in free fall territory.
 


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.
POSITION:  No positions in stocks mentioned.

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