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By Art Cashin Director of Floor Operations at UBS

February 13 (King World News) - “On this day in 1542, King Henry VIII of England discovered that the grandson of Lady Godiva had failed to deliver a box of chocolate confections he had ordered.  Faced with this dilemma, Henry decided to opt for executive privilege and had his then wife, Catherine Howard convicted of misconduct and beheaded on the day before Valentines Day.  To avoid domestic discord, order early or be sure to have authority unlimited.


The bulls were hoping for an early Valentine treat Wednesday but when they opened the box, it was empty.


The Generals Refused To Follow The Techs, Stalling The Rally – Stocks tried to extend the rally for one more day but the Dow and S&P couldn’t pull it off.


The bulls looked okay at the opening but by 10:00 the magic wore off and the Dow went into a fade that lasted until noon.


Here’s how I surmised things in my midday note:


S&P moved to 1826 post-opening, possibly just to frustrate a couple of techs who claimed to see resistance at 1823.


Bulls remain at some risk until they meet or exceed old high (circa S&P 1850).  Topping out lower might present case for a right shoulder.  Part of the 1929 analogue floating about is partly dependent on a head and shoulders.


Run rate at noon projects to an NYSE final volume of 660/740 million shares.


(The final NYSE volume limped in at 642 million shares.)


In case you are the one person who hasn’t seen it, there is a chart being emailed all over Wall Street with a chart of today’s market overlaid on a chart of the 1928/1929 market.


It is my understanding that it was pulled up by Tom DeMark and that he, and Tom McClellan have commented on it several times since November.  That’s why it has moved into trader buzz in recent days.


Luckily, Wednesday’s pullback remained narrow enough that it did not confirm the right shoulder thesis – but it also failed to eliminate it.


The final two hours saw waffling as traders tried to gauge any impact from the on close orders.  After a couple of reverses, the closes ultimately paired off, leading to a mixed closing bell.


Another Pair Of Eyes – Keene Little, an associate of my friend, Jim Brown at Option Investor pondered what the market may be setting up for.  Here’s a bit of what he wrote last night:


The market is quite split at the moment and the strong techs have not been matched by the others. It reminds me of the October 2007 high where NDX made a minor new high that was not matched by the others. Deja vu all over again? Clearly the bulls need more buying in the other indexes to support the rally in the techs but as I'll review in tonight's chart, that could be a tall order.


The bulls should hope for at least a small pullback at this point otherwise the rally is going to look like another too-much-too-fast kind of move and it would fit as a blow-off completion to its rally. It could of course go considerably higher before finishing the blow-off top but the harder it rallies from here without a break the harder it will likely fall.


There's still the risk that the strong bounce has been mostly short covering and without the shorts in the market there is risk of a liquidity squeeze in the event of a strong selloff. We know the HFTs are programmed to step aside if selling becomes too strong and as the largest provider of liquidity there becomes a significant problem for the market when sellers go looking for buyers and the only ones they can find are the ones way down below. Hence the flash-crash risk. So the bulls could use a pullback with some back and forth filling and shake out the loose hands and bring in more buying at lower prices.


The setup tonight is for at least a pullback and then depending on the form of the pullback/decline, whether it's choppy or a strong impulsive move down, we'll get some clues as to what should follow. A strong impulsive move back down would suggest a 3rd wave decline has started. But a choppy pullback, with the backing and filling, would suggest we'll get another rally leg and drive all the indexes to new highs. I suspect we will get the answer to this question in the next few trading days.


We're heading into opex week next week, which is typically a bullish time for the market, so a choppy pullback into Friday would do a nice job setting up another rally leg. But if we're going to start a more bearish 3rd wave down then next week will likely be bearish. And when opex is bearish it tends to be very bearish. By Friday we should have a clue for how the following week will go.


Discerning the next course for the market will be made a little more difficult by the east coast storm.  It has postponed Yellen’s Senate appearance and may have traders thinking of something other than trading.


Yet Another Pair Of Eyes – So much good stuff in the in-box this morning.  Is the snow inspiring people?  Here are some morning insights from my friend, Peter Boockvar, over at the Lindsey Group.


The global equity market weakness today, following the snapback over the past week, started in Japan as the Nikkei fell almost 2% as the yen rose to a 6 day high vs the US$. The spillover to Europe was also driven by earnings misses by BNP, Nestle, Rolls Royce, Lloyds and ABB. While the US$ is also weak vs the euro and pound, it’s higher against all the emerging market currencies as the rise in the 10 yr yield over the past few days reverses most of the 3 day bounce in them and this is pressuring EM stock markets. Both South Korea and Indonesia kept rates unchanged as expected and the Bank of Korea said ‘QE tapering is a risk to global growth’ and that changes in Fed policy ‘may increase FX volatility’ which then in turn is an ‘important factor for trade and the economy.’


The Australian Treasurer Joe Hockey also had some comments about the Fed tapering, its impact on the global economy and how to deal with it. He said “It’s not something that hasn’t been foreshadowed…The world can no longer rely on methadone every day. Sooner or later we need to wean ourselves off and that’s what tapering is about…Our own central banks have the responsibility to act in our national interests. It’s a balancing act. The US Fed can speak for itself, but I don’t see any systemic difficulties in developing markets.” Australia also reported a weak jobs report with an unexpected drop in employment and an unemployment rate that rose to 6% from 5.8%, the highest since July 2003.


In the US and ahead of retail sales, jobless claims and business inventories, the sharp equity market rebound completely changed the sentiment of the individual investor as AAII said Bulls jumped to 40.2 from 27.9, a 5 week high while Bears fell to 27.3 from 36.4, a 3 week low with the balance being neutral.


Sounds like we’re back to square one.


Consensus – As Peter noted, several key pieces of data are due this morning.  Market feels like it wants to deliver a new message but storm may distract.  Stick with the drill – stay wary, alert and very nimble.  Good luck with shoveling.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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