Lesson 14/30: Major Market Reversal

By Jeff Cooper, Hit and Run Trading

“A daily SPX from 1990 shows the top on July 16 was a nominal 2 day breakout above an early June high. This year the SPX struck an early June high at 3233 followed by a Breakaway Gap and a pullback to 2965.

Friday the SPX satisfied Gapfil from the early June break. Upside follow through today will likely see a test/push above the June 3233 high.

It will be important to see if the 30 year cycle exerts its influence.” I wrote the above in Monday morning’s report.

The SPX poked its head above the June 8 high prior to a major market reversal.

Sometimes a top sneaks in like a thief in the night, stealth.

Sometimes a top announces itself with bravado, but is doubted because there is not immediate downside follow through and sometimes even a nominal new high over the next few days.

The common characteristic in a top is breakage below a recent breakout point and downside follow through below near-term support.

30 years is one-half of Gann’s Master Time Cycle. It is a natural cycle of 360 months, a circle.

Why 60 years or 2 rotations of 360 is the master cycle is another matter entirely.

30 years ago, in mid-July, the SPX made a stealth top. There was no fanfare, no dramatic large range reversal — such as we saw yesterday in the NAZ.

The following chart from yesterday shows the July 1990 top which led to a textbook 20% 90 day/degree Gann decline.

Notice the early June high in 1990 and the nominal new high/failed breakout attempt in mid-July.

In July 1990, the SPX immediately reversed back below the June high, but quietly without any blaring signal.

The red flag went up on July 23 which saw a large range sell day below the prior swing low. Importantly, July 23 also scored an Expansion Pivot, a large range break below the 50 day moving average.

By contrast, as reflected by a daily SPX, the index currently resides well above its 50 day moving average.

That said, as in 1990, the SPX was thwarted in an attempted breakout over an early June high.

Importantly, I think Monday also was a failed breakout over a trendline connecting the all-time February high and the early June recovery high.

While one day does not a trend make, follow through warns the 30 year cycle may be exerting its downside influence.

Key support is a Bowtie of the 50/200 day moving averages around 3030.

While one day does not a trend make, the leader, the NDX, rallied more than 2% intraday to set an all-time high, then reversed to close down by more than 1%.

It’s only done that twice: Monday and March 7, 2000.

The NDX made a major top on March 10, 2000 that preceded a 3 year bear market.

The NAZ left a Key Reversal Day on March 7, 2000, followed by a push to a new high on March 10 which left a Lizard sell signal, a new 10 day with a Topping Tail, a low and close near the bottom of the session after running up.

The NAZ high in 1990 mirrored the aforesaid high by the SPX in 1990.

It pushed above an early June high and reversed with authority.

It knifed below the prior swing low from late June and followed through decisively.

Again, this change in character revolved around losing the 50 day line.

Checking the NAZ here in July 2020 shows it left a large range Key Reversal Day on Monday.

That is to say, it gapped up to a new 52 week high (in this case an all-time high) and reversed to close below the prior day’s low.

It also left my Gilligan sell signal, which is a gap up to a new 60 day high and a close at/near session lows.

Yesterday was a blaring sell signal coupled with a red flag.

So given the lessons of the 20 and 30 year cycle tops, it will be important to see what plays out the next few days.

A top, if that’s what we have, like a bottom is more often a pattern high or low.

It will be the action over the balance of this week and how the market closes out the week that will distinguish itself I think.

On the above daily NAZ there are two trend channels, a 3 month channel (red) and a 1 month channel (green).

Yesterday’s reversal occurred from a picture perfect test of the 3 month channel.

The bottom of that channel currently ties to the NAZ 20 day moving average.

Notably, the last two pullbacks undercut the 20 day moving average before marching to new highs.

Consequently, the NAZ has traced out a possible 3 Drives to a High pattern.

The implication is that breakage below the 20 day from here could offer a conspicuous change in character.

It would trigger a Rule of 4 Sell, a break of a 3 point trendline, in tandem with a Grail Fail, a failure of the 20 day m.a. to act as support.

So the 10,120 region is beaucoup support, but also the Maginot Line.

Just below is the green trend channel that connects the last two swing lows/tests of the 20 dma.

That trend channel ties to around 9900.

Summary. The pundits say that yesterday’s reversal had to do with a shut down of the re-open in California.

The market has been shrugging off all Covid spikes for weeks, so who knows.

The news matters when it matters.

As I always say, the news breaks with the cycles, not the other way around.

As I always say, the news breaks with the cycles, not the other way around.

A 10 min SPX shows the false breakout intraday on Monday which triggered a micro Boomerang sell signal when the index knifed back below the intraday consolidation.

This looks like a fractal of the dailies from the early June high.

If so, this is what to watch for, rally attempt or not over coming hours/days.

Notice, the acceleration on Monday when the SPX “Jumped the Creek” — when it offset Monday morning’s gap.

Checking the dailies, the SPX had a major gap to the downside on June 11, on the heels of the June 8 recovery high.

That gap was reclaimed yesterday, but the bulls snatched defeat from the jaws of the bears.

The bottom of the June gap ties to our 3115 level of lore, which in turn ties to the 20 day m.a.

So let me keep this simple. Breakage below Monday’s lows gets bearish.

And breakage below 3115 opens a Trap Door to the 2900 region.

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About Jeff Cooper

Jeff Cooper began his trading career at Drexel Burnham in 1981. In 1986, Cooper went out on his own, choosing to trade exclusively for himself.

After establishing a successful career as a private trader, he went on to write two best-selling books: Hit and Run Trading: The Short-Term Traders’ Bible and Hit and Run Trading 2: Capturing Explosive Short-Term Moves in Stocks.

Today, Jeff trades from his home in Malibu, California, and authors the Daily Market Report for hundreds of professional traders, portfolio managers, and individual investors across the globe.