High-Level Consolidation

Today at 8:30 the year-over-year inflation numbers will be reported.

There is no way of knowing what the numbers will show or how traders will react.

However, see the following tweet from money manager Jeffrey Gundlach:

A relative of mine in middle America just had her rent contract expire. The re-up for the next twelve months is up over 40% from last year. Let’s see how far from reality the shelter component of the CPI is tomorrow.

— Jeffrey Gundlach (@TruthGundlach) August 10, 2022

What we do know is that a pullback was on the table when the Monthly Swing Charts turned up on the popular indices in early August and that pullback picked up steam on Tuesday.

Despite a relatively subdued decline in the SPX, many leaders got hit hard yesterday.

This was spearheaded by the semiconductors, which were already on the ropes on Monday on the heels of NVDA’s report.

Then came MU’s report on Tuesday which sent the chips reeling.

Names include our AOSL short idea, ACLS, ON (both of which were in the region of all-time highs.

The usual suspects like AMD and QCOM led the hit parade.

The damage spread across the tech landscape into software names like OKTA and TWLO.

It remains to be seen if the recent breakout over multiple tops in many tech leaders such as ZS and BILL were the real deal, and if this is a check-back or backtest of the breakout point, or whether this is going to mark a pernicious breakout failure.

Tuesday was the SEVENTH day of a high-level consolidation. The pattern is virtually identical to the pattern through June 8, 2022.

The vast majority of traders were rightfully expecting the SPX to come out of the high-level consolidation to the top side.

That is the normal expectation from a Bull Flag.

However, on the eight day the SPX gapped down and kept on sliding as a waterfall decline played out.

It was a textbook, “fast moves come from failed patterns”.

Now we are in another high-level consolidation.

Theoretically one could argue that the SPX is in a nine-week Stein & Handle pattern (bullish).

On the negative side, the “Handle” is wedging higher while a classic bullish Handle would be wedging lower…ideally.

There is another conspicuous distinction between the early June consolidation and the current early August consolidation:

In the early June pattern, the eighth day, June 9^th, saw the SPX knife below its 20-day moving average.

As well, the entire early June high-level consolidation was BELOW the 50 day moving average.

The current high-level consolidation is perched meaningfully above both its 50 day and 20 day moving averages.

So, the SPX is in a stronger position.

However, that does not mean it is not vulnerable to a shakeout to the region of its 20 and 50 day ma’s around 3950 to 4000.

This is a level we’ve been focusing on for a week now based on the Sq of 9 Wheel, but now there is the confluence of a 20/50 moving average Bowtie below.

In sum, a drop to the 3950-4000 region should perpetuate another rally to a test/overthrow of Monday’s highs.

This depends upon when the big picture cycle is going to exert its influence: now or in late August.

Part and parcel of this high-level volatility coil is that yet another NR 7 Day occurred in the SPX on Tuesday-- right in front of today’s CPI.

I still suspect the SPX will turn its 3 Day Chart down.

It’s a matter of whether that turndown is shallow or deep-- dropping to the 3950-4000 region.