By: Jeff Cooper

Hit and Run Morning Stock Report: May 16, 2023


The narrow band of the last six weeks’ 140 point SPX range continues in what is called a coil.

Imagine you’re watching a soccer game where both teams are evenly matched. The ball gets passed back and forth in the middle of the field but neither team can score. This is similar to what is called a coil or compression in stock trading.

In a compression phase, the market’s price doesn’t go up or down all that much---it just kind of hovers around the same area much like the soccer ball being stuck in the middle of the field. This happens because the number of people wanting to buy the stock roughly equals the number of people wanting to sell it.

Traders pay close attention to these periods of compression because they are followed by a breakout which is like one of the teams in the soccer game suddenly scoring a goal.

In the stock market the price will shoot up or drop significantly.

The bull team thinks it’s accumulation.

The bear team thinks it’s distribution.

How long will this compression/coil last? No one knows unequivocally.
We look for the market’s tea leaves and clues in patterns and cycles from the past.

One conceptually correct trading aphorism is that as long as “they’re not going down, the line of least resistance in INDIVIDUAL names may be up”.

In other words, as long as the overall market is not getting hit, individual names can be driven higher.

As my dad used to say, “Stocks don’t move, they are moved.”

So under the surface of the market running in place, individual names are reflecting risk on in May.

Names include MDB, ZS, B ILL, CRM and META to mention a few.

Are these runs pointing to an eventual breakout in the SPX of itss coil or does it represent risk within the context of a bear market rally?

If a new bull market is in progress a breakout to the topside will be successful.

In an ongoing bear market rally a breakout to the topside will be a failure while a downside breakout

Will tell us a big move will likely have begin.

A close below the low of the last six days at about 4099 opens the door to a significant breakdown on a close below SPX 4040.

When that happens, we will look to leverage up the short side.

Summation. While it feels like stocks have been laboring through a dull sideways move since early March,

Mr. Volatility is lurking and fast approaching.

But when we study the move from March 1, the move is really not so dreadful.

Herein lies the clue in the wave count for what is going on for the last two months.

I see 5 waves up into May 1st to our 4187 key level. This is 540 degrees up from the March low.

I see a 3 point trend line from the March low that was tested on Friday’s outside down day.

Again…Jello…no downside follow-through.

This trendline is currently sitting at the aforesaid 4099.

We have a possible set of downside dominoes to the downside if the energy from the current coil releases to the downside.

Anyone see any potential catalysts?

Allow me to explain.

Checking a monthly SPX from 2018 with a 50 MONTH moving average is revealing.

The index crashed in December 2018 coming to rest precisely at its 200 month ma.

In the March 2020 crash, the SPX CLOSED precisely on its 50 month ma.

The closing low since the January 2022 ATH was in September 2022---just above the 50 month ma.

A trend line connecting the major March 2020 closing low with the September 2022 low ties to 3900.

Breakage below 4099 with follow thru, opens door to 4040. Breakage below 4040 opens door to 3900.

Below that opens door to new bear market lows below 3591, the October 2022 low.