The trade in January 2010 is a fine illustration of why my newsletter is called Structural Logic. The market is composed of key structures. Market participants tend to move in schools, much like fish do, from one key market structure to the next. In between these market structures, price and is distributed, that distribution takes the general shape of a bell curve. At the key market structures, however, there is little volume. Key market structures are much more than price pivots, they are significant psychological structures or anchors that are embedded in the long-term memory of market participants. That is why the market tends to leave “tails” or “long shadows” around these key structures when tested.

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Three times the market the charm they say, four not so much so. In fact, as I pointed out in the last report, the Japanese word for four is “shi,” the same sound as the word for death. Well, after setting the 2010 Year high on Jan 11, the stock market tried three times on Jan 12, Jan 15, and Jan 19 to rally off the 2009 year high. All three attempts (on Jan 14, Jan 18, and Jan 19) failed to set new highs in 2010. The failure to set new highs after the third attempt (Jan 19) was a death signal for the 2009 year high to act as support. This morning, that support caved in, and the stock market round tripped to the 2010 year low at 1113 and 2009 year close at 1110.75. What we don’t know is if the 2009 year close is sufficient to act as support. What we do know is that there is the potential for further downside risks this week with GE reporting earnings on Friday Jan 22. From Bloomberg yesterday:

Jan. 21 (Bloomberg) -- "General Electric Co.’s stock may trail industrial competitors until finance rules being crafted by Congress and President Barack Obama give a clearer sense of who will oversee its shrinking finance unit and at what cost. “There’s so many questions out there with regards to reform and the wind-down that people are just on hold until that unknown is gone,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors in Cincinnati, including GE shares and bonds. GE may say tomorrow that fourth-quarter profit fell."

What we also know is that the next key support below 1110-1113 is the active 4 month moving average sloping into 1095 and intersecting the Dec 17 low at 1096, just below the Q3 2009 earnings season high at 1099. We also know that the sudden stock market weakness this weak will be partially offset by the Jan 27 FOMC statement and Jan 29 Q4 GDP report next week. This is one of the reasons leading me to the conclusion that the low in January will be set this week. I will detail other reasons in this evenings report. In short, this is a good week for buy covers at the least.

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