Market Poker: Hold 'Em or Fold 'Em?

Last week I stated that a break of 890 needed to be respected. That certainly played out on Monday. The market knew the number. Likewise, I said that it is not the break of well-defined support (or resistance) that is meaningful but the behavior subsequent to the break itself. Well, Monday was Veterans Day and banks were closed. No trust departments were in the marketplace. Tuesday will give us a more accurate picture as to the position of the market.

But keep in mind that many times the market will behave counter to the trend during semiholidays. It will be interesting to see how stocks respond to the first Cooper 1-2-3 pullback on the S&P since the Oct. 10 low.

Conclusion: We are obviously in the first bona fide pullback since the October low. Of course, there is always the possibility that a pullback turns into a full-blown rollover. But I think there is a better-than-average likelihood that this first genuine pullback has just defined the first leg up. If, as I have speculated, we find a low by Tuesday, then this pullback should define the low for a symmetrical next leg up, which will project to the 200-day moving average.

As far as forecasting whether a top is in place or whether a low is in place, in truth, only on strength (or lack thereof) of the first bounce off this pullback will the verdict be in the cards.

I believe there is a better-than-average likelihood there will be a strong directional bias from Tuesday through expiration Friday. Accordingly, if we find a low on Tuesday morning, then that would indicate a run into Friday.

It is also interesting to note that near Monday's lows the S&P vibrated off the important July 23 closing low of 877-878. A diagonal drawn from July 23 runs through 878. When using the Square of Nine, it is always important to take into consideration the vibrational points where prior lows and highs occurred. (For a primer on the Square of Nine, check out this article.) These are your zero, or starting, points, the impulse points from which ripples of time and price interact.

Strategy: Despite the fact the S&P traded below its 20-day moving average, many times the market goes further than we expect it to. This is why you have to wait for setups to trigger. Setups are only setups. A quick recovery by the S&P on Tuesday of its 20-day moving average would revalidate the Holy Grail buy setup. But for now that has to be counted as a failed setup.

On the Square of Nine Calculator, 877-878 is on a diagonal that runs thru July 23 (A). That "vibration" caught the S&P on the first reaction down from 924 on Sept. 3 (B), setting up some interesting potential symmetry. Note how, in a possible mirror image, in September the subsequent move found resistance at the 50-day moving average (C), while currently the 50-day moving average sets up as support.

The first tag of a long entrenched trendline typically can lead to a pullback. My guess at the moment is that this trendline will be broken.

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Jeff Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books Hit and Run Trading (The Short-Term Stock Traders' Bible), Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and co-founded a trading markets Internet site. Click here for information about Cooper's email newsletter, The Trading Reports. At time of publication, Cooper held no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Cooper cannot provide investment advice or recommendations, he welcomes your feedback. If you are interested in information regarding the Money-Flow Timing Model, please visit www.mutualmoneyflow.com

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