By: Jeff Cooper
Hit and Run Morning Stock Report: May 23, 2023
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The daily SPX below shows the price action from the January 2022 peak to the October 2022 low and thru yesterday.
1) I connected the June 2022 low to the October 2022 low a bottoms line (blue), and paralleled a tops line from the all-time high.
The SPX hit that important level on Friday and Monday just above 4200 which ties to the 421 square-out with May 19th.
2) The red horizontal band represents resistance defined by the February-March 2022 lows and the August 2022 peak. We’re there.
3) The declining purple line connects the all-time high with the March 2022 high, the August 2022 high, and the December 2022 high. The index broke out above that trend line in January 2023 running up to the bottom of the red band and pulled back. The pullback was a bullish backtest of the purple trend line by virtue of the fact that it provided support and perpetuated a rally to new highs for 2023.
4) Connecting the October 2022 low and the “backtest low” in March 2023 gives a trend line (green) to the 200 day moving average. Paralleling a trend line from the June low to that rising bottoms green line
Defines a series of highs in November and December 2022. If the SPX can clear the 4210 region and eclipse the horizontal red band, theoretically it may push toward the upper region of the green Ghost Line as high as 4500.
Be that as it may, if the index is going to rally significantly higher it has its work cut out for it: it must clear the red horizontal resistance and the declining blue tops line.
Either way, that should not change the prospect for a significant down leg and the strong likelihood of a crash.
I believe that a top before the end of May will see a waterfall of some degree this summer.
The normal expectation for plunges is in October, but I believe if Mr. Market has a date with destiny it will be in the summer.
The Summation Index and NYMO indicate caution.
Markets are extremely extended with the McClellan Oscillator barely hanging on with the SPX at a 2023 high.
Notice the divergence between where the Summation Index is currently with the SPX at new 2023 highs compared to where it was in early March.
It will be interesting to see if the market starts down whether the purple Ghost Line in the 3750 region acts as support, a Bull Catcher much like the backtest in March. That would be last ditch support on the way to the 3200 region.
3200 would be a 3rd drive down to the bottoms line connecting the June and October lows.
Connecting the June and October lows ties to 3200 in July.
It seems like the short straw but that’s a 1000 point drop from current levels in a matter of months.
In summation, the word is awaiting The Debt Deal. Everyone knows it’s a done deal, right?
It’s just politics and brinkmanship that’s playing out now, right?
What if it doesn’t happen?
There seems little connection between the political fiasco and the rockets from the 2020-21 winners.
Names include UPST, AI, TWLO, ZS, and OKTA to mention just a few.
I can’t help but wonder that the bearish sentiment surrounding the debt ceiling is seeing massive squeeze in individual names scaling a vertical wall of worry.
In other words, the bearish positions taken into this Mexican Standoff are grist for the short-mill.
So even if a midnight deal happens, what does the market do for an encore?
Is the Mother of Sell In Mays on the table?
Is the “good news” of a deal (if you can call an agreement that piles more debt on top of $30 trillion good news) already “baked into the cake?
A study of past topping pattern in the stock market shows they all have something in common:
1) A wall of worry.
2) A fake out/breakout...a last ditch run for the roses.
In 1929 for example there was an important low at the end of May that led to a Rule Of 4 Breakout… a 13 week run.
3) A disconnect with the underlying economics
In 1987 there was also a big low in May that led to a 13 week blow-off.
Of course the summer rallies in 1987 and 1929 came out of high-level consolidations…not lower highs from an all-time high 18 months earlier.
I think May 2023 is also a major pivot, a mirror image foldback to those prior two Mays that marked upside acceleration.
May 31st is square September 3rd, the high day in 1929.
May 23rd is square August 25th, the high day in 1987.