By: Jeff Cooper
Hit and Run Morning Stock Report: June 12, 2023
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“You’re calling my name but I gotta make clear
I can’t say, baby, where I’ll be in a year.”
-Aerosmith, Sweet Emotion
Several months ago I outlined my projection for the SPX to rally to over 4300 IF the SPX could clear a key level we’d been targeting of 4187.
The sharp reversal from precisely 4187 on May 1st led me to believe the rally from October 2022 had culminated; however, the turn down of the 3 Day Chart defined a low at the 50 day ma and the SPX stabilized and broke out above out 4187 level on May 18th . Following a backtest of the breakout pivot in textbook fashion the SPX went on to push higher.
Now that the SPX has broken out above 4187 and the QQQ has broken out above its August 2022 highs it’s time to decide what your risk posture should be.
It’s easy to jump on the band wagon and get emotional on a breakout when nearly everyone around gets overly bullish (or bearish on a breakdown to new lows). One of the hardest things a trader has to learn is to analyze the market with as little emotion as possible and observe whether a breakout elicits follow thru or failure.
Not all breakouts are created equal.
Let’s look at a few examples.
The SPX broke out over its December 1999 peak in March 2000 in a two week last ditch run for the roses after the excitement of Y2K being a non-event. The emotionalism was palpable and it marked the Tech Bubble Top. The SPX dropped nearly 20% in 3 weeks.
Notice that following that drop the index carved out 3 Drives To A Test of the March 2000 peak before going down for the count for over two years.
We’ll circle back to this pattern in a bit.
In late February/early March 2009, the SPX broke down, undercutting its November low marking a bottom that elicited a 6 year advance prior to any meaningful correction. A false break marked the bottom.
The SPX Pinocchio’d its March 2000 peak in July/October 2007 prior to a brutal bear market.
In fact the October high in 2007 was itself a false breakout over the July “breakout”. A false break marked the top.
More recently the SPX broke below its June 2022 low in late September 2022 but struck a low two weeks later---a low that is still perpetuating higher highs and higher lows.
Currently there’s a lot of excitement and emotion over the NDX/SPX run to new highs for the year.
Baron’s cover depicts a bull. Whether this carries the same Magazine Indicator punch of the bear on the Newsweek cover a month before the historic October 1974 low remains to be seen.
The American Association of Individual Investors shows 44.5% bulls, the highest since November 10, 2021…just 12 days before the NAZ all-time high.
The last time it was “a new bull market” proclaimed by nearly every pundit and media outlet including the Wall Street Journal was in August 2022. The NAZ fell by 34% over the next two months.
Above I mentioned the pattern of 3 Drives To A Test of the SPX March 2000 top that played out into the end of August 2000.
Currently the SPX shows what looks like 3 Drives To A Test of the aforesaid important August 2022 high.
From that 4325 high, the SPX tumbled to 3491 in 8 weeks.
Importantly, this same level being struck by the SPX is the Low Before THE High…the low in October 2021 that led to the January 2022 all-time high.
This also ties to the low of the first decline of the bear in late January 2022.
So we’re at a critical juncture. Underpinning the significance of this juncture is that Friday we tested a Fibonacci .618 retrace of the 2022 decline.
By the way this is the same level where the 2008 bear market rally failed which many were calling a new bull market at that time.
In addition to this .618 retrace:
1) On Friday the SPX left a Combo sell signal, a Lizard sell signal and a Soup Nazi sell signal.
Allow me to explain.
A Lizard is a reversal strategy I created to identify short term exhaustion which often times defines larger turning points. It is a Topping Tail from a new 10 day high. A Topping Tail is a run up from the open that sees price settle at/near the opening lows of the session.
A Soup Nazi is a new 20 day high with a reversal back below the high of at least 4 sessions prior within that 20 day lookback. So, “No Soup For You.” The purpose of the 4 day interval is to try to guard against continuation moves. Market’s like to test turning points so the idea is that the market has found a high, pulls back and then rallies to test the high but sees a test failure. A Soup Nazi is the first indication of such a failure. FOLLOW THRU (as always) IS KEY.
2) Additionally, on Friday the SPX touched the top rail of a trend channel at the 4320-30 region which connects the highs from the initial impulse to the April 3rd high from the March 13th low.
3) This 4320-30 level is 180 degrees straight across and opposite June 9th. Moving a decimal point shows 432/433 is opposition June 9th.
As well, 428/429 is 360 degrees up from the 349 (3490) October 2022 low. The SPX ran up to the aforesaid 432 square-out on Friday and was rejected closing right on the 429 square-out.
The QQQ also ran up to a new recovery high on Friday and tailed off from our key 358 level, closing at/near session lows thereby also leaving dual sell signals---a Lizard and a Soup Nazi.
358 is important as it is 540 degrees (a true square) up from the
One of the benefits of this unique trading tool, the Square of 9 Wheel, is that it takes a lot of the emotion out the markets.
By integrating time and price it allows traders/investors to anticipate and gauge whether a breakout is false or the real deal.
As offered on Friday on the Hit and Run Private Twitter Feed, there is a “natural cycle” that hits over the weekend that suggests a sharp shake-out.
A sharp shake-out could see the SPX drop to the bottom rail of the trend channel in the 4187 region.
Notice how this ties closely to a rising trend line off the mid-March low and the 50 day moving average.
Breakage below 4187 region opens the door to a trend line connecting the October 2022 low and the March 2023 low in the low 4000 region. This is the Maginot Line going into the second half.
In keeping with the above ‘natural cycle’ due to exert its influence, the news breaks with the cycles and this week the May inflation data will be reported and the Fed will reveal their latest decision on interest rates. Market participants may be celebrating a Pause or a Skip, but historically, once the Fed’s rising interest rate cycle tops, typically the stock market declines.
In sum, with emotion now turning quite bullish, with a possible bearish 3 Drives To A Test pattern playing out since the October 2022 low in tandem with the open gap from August 2022 being filled and the Fibonacci .618 retrace being tested, with Time Price square-outs on the SPX and QQQ being hit, I am going to ask: is this the time to embrace risk because a “magical” arbitrary 20% advance has been satisfied---presumably a blaring siren of a bull market?
This week Hit and Run morning reports will walk through why I believe the structure from 1986 and 2000 looks terminal and indicates caution is warranted as to the big picture and what levels a bear market are targeting.