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What Shoulders, Quasimodo?

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Editor's Note: This article 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.

Today looks like a big day. It will either be a big down-day or be a big-down, opening reversal. Even if the indices go flat in front of tomorrow’s option expiration, it’s bearish as individual vertical glamours are ripe for profit taking under the surface, such as TripAdvisor (TRIP) yesterday - which was highlighted before the plunge.

Ditto Qihoo 360 Technology (QIHU), which left bearish Train Tracks and a Soup Nazi sell signal. It looks vulnerable right here.

However, I think there is a better than average chance that if the 170 SPY strike is lost with authority, which looks like the case after yesterday, we will get downside follow through below the little necklines of Head & Shoulders tops on the SPX and RUT.

A break of 1680ish, the neckline, projects to 1650 and the 50 DMA. Is it possible  that the SPX could satisfy a decline to 1650 (165 SPY strike) into Friday’s expiration?
It may happen. If the Head & Shoulders is triggered, especially on a gap, the SPX would also be stabbing through the prior May highs. Since prior highs are supposed to act as support in a bullish scheme of things, a failure here could inspire substantial selling/profit taking.
The thing is, it’s just too thin out there in August for the market to accommodate all those who have been respecting the uptrend but may want to trim positions. So a panic, a least a short-term one, could play out.
Yesterday seemed to be telegraphing a break since it was the first trend day down in a while -- a day without the usual whipsaws. So someone(s) could be lined up with sell tickets.
Notable is that the DJIA is hovering just above its 50 and poised to close below it on the important weekly Friday closing basis. So, there may be bulls who want to front run that eventuality.

Note the double bottoms around 14,500. Is it possible a break of the 50 DMA could see a decline toward 14,500 for a test of the 200 DMA, followed by a backtest of the breakdown line? If so, a failed backtest could see a subsequent triple-bottom-sell signal in months to come.
If the indices don’t entirely erase yesterday’s loss and don’t reverse green by the first hour, an abundance of caution looks warranted. The correction will probably have started. And, with a squadron of Hidenburg Omens out there, a correction could be a waterfall event.
The markets look coiled for something big. 10-year yields have been spiking for months while equities have shrugged off the rise in yields and continued to push to new highs. This is what occurred into August 1987 prior to a crash. The spread between yields and equities may be resolved with a whoosh.

Note what looks like a big picture Cup & Handle (bullish) on the 10-year yield chart.

GLD is poised to attack the key 130 level, which will confirm a breakout for many. The question you want to ask is whether gold bulls like Paulson held firm during the second quarter crash in gold and need to buy back into gold to some degree, or whether we are about to witness the Revenge of the Gold Nerds?

Remember; there is an outstanding projecting based on the Wheel of 137 to 143 on GLD. Can it happen in a flash?
Conclusion: Follow through from yesterday’s trend day leaves the SPX suspect for a test of its 50 DMA. A break of the 50 and a break of 50% of the range from the June low to the August 2 peak could cause a cascade.
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Editor's Note: This article 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.