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This column was originally published on RealMoney on Oct. 20 at 7:04 a.m. EDT. It's being republished as a bonus for readers.

On Wednesday, the market started down on the heels of a poor report from


(INTC) - Get Free Report

. In the process, our 1176 pivot on the

S&P 500

was substantially undercut as the index skidded to 1170. We will show why that level is/was important further on in this commentary.

The morning decline was blamed on Intel. So did the subsequent reversal have Intel inside? What were the factors that caused Wednesday's reversal day? Although some may lay Wednesday's rally at the doorstep of the


beige book report or other data points, I am not buying any of it. There is always a data point and there is always a reason to act or not to act.

You've got to have technical tools that will define your parameters on multiple time-frame analysis. That is the bottom line. For example, a daily low was tested. Now the weekly high is being tested. Some may think that Wednesday's rally was generated from natural buyers -- bulls waiting in the wings. That remains to be seen. I have other thoughts that I will explain as you read on.

So what were the keys to Wednesday's reversal? The chart below is an hourly chart of the S&P for the month of October shown yesterday. As you can see, a Live Angle drawn in red shows that last-ditch support for a rally attempt is indicated on a test of just above 1170 S&P. On Wednesday morning, the S&P made a first-hour low at 1170.85:

Following the Principle of Tests, that Live Angle was successfully tested on Wednesday.

In addition, Wednesday's decline also represented a test of our Lizard Buy Setup from last Thursday.

Yesterday, we stated that the failure by the S&P to test its overhead resistance at 1200 suggested serious weakness and selling pressure. But I also went on to say that the S&P failed to reach this 1200 level on its first attempt. In other words, the market does not like to accommodate. The possibility that 1200 may yet be tagged remains. But the market is infamous in its aversion to doing what is expected when it is most expected. The market seldom goes where it is going in a straight line.

Finally, as you know, it is options expiration week, and as we stated yesterday, anything can happen. Anything happened on Wednesday. Why? I believe that a key factor in Wednesday's rally was that the big arbs unleashed buy programs to keep naked puts from exploding in their faces.

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Moreover, the big Boyz love to play Pin the Tail on the options donkey going into expiration. With puts on the S&P ballooning this month and with calls on the 1200 strike on the index shrinking to a fraction for Friday's expiration, the S&P kissed the 1170 strike and was jammed toward the 1200 strike within a few hours going into the bell. The S&P settled at 1195.75. What a swing.

The moral of the story is that there are few choir boys on Wall Street. It is a lot easier and there is a lot more money to be made by taking a call at a fraction to one or two dollars for a 1,000% gain in a day or two than it is to invest in a $50 stock and ride it to $60 for a 20% gain over a month. You do the math and figure out what the monthly Pin the Tail on donkey options expiration game plays out to on an annual basis.

Wednesday's Dow rally was the seventh best day this year. The S&P scored a Large Range Outside Day (LROD) -- in this case to the upside. Will this LROD lead to follow-through? That will be the key. As you know, the area of resistance that we have been using is 1200 to 1210 S&P. After a test on one wheel of time (in this case a test of last Thursday's reversal), the expectation would be for a turn up on the next larger wheel of time -- in this case, the weekly wheel. Last week's high was 1196.50. Wednesday's high and close were 1195.75. Consequently, it is a virtual certainty that a turn up in the weekly chart, probably on Thursday, will take place. The behavior from that point will be crucial as a test of 1200 plays out. I believe Thursday was either a one-day spike or the rally will last into Friday.

Keep in mind that a test of 1200 S&P does not mean the index cannot and will not squeeze above 1200, grabbing protective stops on the shorts. The 200-day moving average is a widely advertised measure of price action. It is important to note that 90 degrees down from this year's 1245 high is 1210. With that said, it is also important to remember that it is necessary to measure squares not just from the last swing high but also from the last important swing low. The low in April -- the quarterly swing low -- was 1136/1137 S&P. Guess what 90 degrees up from that level is? It is 1170/1171. One-hundred and eighty degrees up from 1136/1137 is 1204/1205. Consequently, 1204 to 1210 is a wall of resistance.

Tomorrow, I will show you how the date of the important Oct. 3 high is a harmonic of the price of the April low -- in other words, a time and price square-out.

Moreover, it will be important to observe the behavior going into Oct. 23 because it is 180 degrees or days (opposition) from this year's April 20 low. This six-month period is a natural balance point and turning point many times.


: How could one identify Wednesday's reversal as it was occurring? The chart below shows how the above-mentioned 1170 level and our key 1176 pivot were the parameters bracketing Wednesday's reversal. Happenstance? You cannot make this stuff up. Each day in the Pivot Point section of my

Trading Reports, I show a chart like the one below.


: The sharpest rallies occur in bear markets, just as the sharpest declines occur in bull markets. Although Wednesday's LROD was at least three days off the low, qualifying it as a potential Follow-Through Day, beaucoup resistance, based on the S&P, is just overhead. It will be the behavior of this index as it turns its weekly chart up and its behavior near 1200, where a Necktie of its 200- and 20-day moving averages awaits, where the market will do the talking.

S&P 500 10-Minute

S&P 500 60-Minute

S&P 500 60-Minute

S&P 500 Daily

S&P 500 Daily

Newmont Mining Daily (NEM:NYSE)

P.S. from Editor-in-Chief, Dave Morrow:

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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.

Mr. Cooper is also a principal at Mutual MoneyFlow Management, a money management firm that is a registered investment adviser. MMM and its affiliates may, from time to time, have long or short positions in and/or buy or sell the securities or derivatives thereof, of companies mentioned in Mr. Cooper's columns. In such event, appropriate disclosure will be made. None of the information contained in Mr. Cooper's columns constitutes a recommendation by Mr. Cooper that any particular security, portfolio of securities, transaction or investment or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. While Mr. Cooper cannot provide investment advice or recommendations, he appreciates your feedback;

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