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Special Report: There Is No Baptism Like Momentum

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Everything that happens once can never happen again. But everything that happens twice will surely happen a third time.
-Paulo Coelho

This Dow Jones Industrial Average (INDEXDJX:.DJI) chart shows a possible 13-year Megaphone Top pattern, which is sometimes called a Broadening Top.

We’ve walked through the significance of the 13-year cycle many times in this space, but to recap briefly:

1) From the major October 1974 bear market low to the 1987 top is 13 years.

2) From 1987 to the 2000 top is 13 years.

3) From 2000 to 2013 is 13 years.

4) In addition, from the 1929 peak to the major 1942 low was 13 years, while 13 years from 1942 gives 1955, which marked a high and the first time in 25 years that the DJIA eclipsed its 1929 top.

The Megaphone formation is a 5-point pattern of ascending highs and descending lows. This pattern has marked the beginning of every major bear market since 1929.

The last largest leg up in the Broadening Top is a powerful wave indicative of a huge shift in investor sentiment. Since the current market is dominated by money managers, this paradigm shift is underpinned by the Fed and the Bernanke Put, just as the run up into 1987 was underpinned by the notion that portfolio insurance would protect the vast majority of investors.

It did not.

Currently, the vast majority of players worship at the shrine of the Fed. And even if they aren’t true believers, they have learned to disabuse themselves of fear of flying in order to compete for performance. Eventually, in the later stage of the final leg up, even the infidels are brought into the tent, kicking and screaming. There is no baptism like momentum.

I believe the current formation is the largest such potential Broadening Top ever.

I believe the tremendous up and down moves within the current formation underscore the Fed’s boom to bust to boom handiwork.

With virtually the entire Street of true and untrue believers packed into the Fed’s Salvation Tent Show, I can’t help but wonder what happens if the Fed falls off its perch.

What happens if the Fed miscalculates like it did on 9/18?

Obviously, the Fed has done a marvelous job of avoiding panics since 1913. Of course, few mention this as part of their charter. Ditto maintaining the value of the greenback.

Obviously, their advertised mandates of low inflation and ‘full’ employment have been working well.

With the market straddled between the major early October historical turning points (2002 low, 2007 high, 2011 low) and the 60-month anniversary of the crash low in November 2008, the question you’ve got to ask yourself is whether the DJIA is going to tag the upper ascending trendline (point 5) or whether it’s close enough for government work.

Feelin’ lucky?

Note that the first left up off the 2009 low of 6470 ran 6459 points -- a virtually clean 100% advance which was followed by the largest reaction of the last 4 1/2 years, what I call the ‘reset’ into early October 2011.

A measured move off leg A’s 6459 points ties to 16,864 DJIA. This would satisfy a picture-perfect kiss of the upper trendline. No one knows whether this will play out. If it’s going to though, I suspect that it is 4th quarter 2013 business and that such an extension will occur from an October low that holds a higher low -- probably around 1650-1660 on the S&P 500 (INDEXSP:.INX) to mix index apples and oranges.

Remember, yesterday’s report noted that this 1650-1660  level vibrated off the October 10  (+ or -) anniversary matrix. That said, while there is remarkable symmetry within the touch of the trendlines of the current broadening formation, the market does not exist to accommodate and I can’t help but think the idea of a picture-perfect kiss (of the upper trendline) may not be too pat.

If the Megaphone Top is going to satisfy the upper trendline, I can’t help but think it will do so into the 60-month cycle off the late November anniversary of the 2008 crash low.

It is interesting that from this week the Gann/Fibonacci 55-day count ties to November 21/22. Obviously, this time frame is straight across and opposite the May 22 peak at 1687 SPX.

Although the SPX rallied to close nicely above this key 1687 level on Tuesday, this morning’s pre-opening action looks like it is giving back yesterday’s gains.

While it would have been easy for the SPX to trace out a second higher daily high today on trade above yesterday’s high (since the index close at/near session highs on Tuesday), thereby satisfying the first Minus One/Plus Two daily sell setup since the record highs,  instead we’re getting a reversal following a turn up of the Daily Swing Chart.

This is what occurred on 9/26 when a turn up on the dailies defined a pivot high. This action is the sign of the bear.

Conclusion. The 1687  SPX level has shown a powerful vibration, first in May and now as the market tries to hold it by hook or by crook.

Since 1687 seems to be a powerful vibration, it is interesting that it vectors October 28th on the Square of 9. Maybe something, maybe nothing, but this is the date of one of the 2 crash days in October 1929.

The forecast in this space for intense swings in September was borne out by a large streak of winning days (10 out of 11) immediately followed by a losing streak of 6 out of 7 days.

If volatility precedes price, is this a bearish omen for October?

With the market in a virtually parabolic phase, 10% corrections apparently banished, and conspicuous divergences between the DJIA/SPX and the Russell 2000 (INDEXRUSSELL:RUT)/Nasdaq (INDEXNASDAQ:.IXIC) , caution is warranted here.

Just because indices are in a vertical phase doesn’t mean they can’t go even higher, but the tension is on the tape and timing looks taunt.

Form Reading Section


Editor's Note: This special 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:  No positions in stocks mentioned.