By: Jeff Cooper

Hit and Run Morning Stock Report: July 13, 2023

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A trend reversal in the 10 day average of the CBOE equity put/call ratio, from a decline to a rise, often coincides with a trend reversal from up to down in the stock market.

The 10 day average has been declining since early May. It struck a new low close on July 11th.

The DAILY CBOE equity put/call ratio plunged to .39 on July 11th.

This the lowest level since November 8, 2021.

Why? Option speculators are euphoric, purchasing 2.6 calls for every put.

The last time speculators were this excited was on November 8th was the exact day several indices made their all-time highs.

These include the RUT, Value Line Composite, the S&P small cap and the S&P mid cap indexes.

The NAZ peaked two weeks later on 11/22/21.

The SPX peaked on January 4th, 2022.

As offered yesterday, we have all seen this kind of euphoria before: 1999-2000, 2007, 2021.

There is significant distinction between those historic euphoric extremes and the current extreme:

The fact that new multi-year lows in P/C readings are occurring with the market at new 52 week highs 18 months into a bear market is compellingly consistent with the top of Intermediate Wave 2 corrective rally.

This extreme in sentiment is occurring within the context of a confluence of synchronous Time/Price square-outs.

Allow me to explain.

Yesterday, July 12th, is 270 degrees/days from the October 13th low for the decline.

In other words yesterday we were square the October 2022 low.

As well yesterday’s high of 448 (4480) is square July 12th.

Get this: 448 is square the 349 (3491) October 13, 2022 low and 349 is straight across and opposite July 12th.

Time points to price, price points to time.

We have a lot of time/price synchronicity that the market has satisfied here  but momentum persists for the moment.

So the question now is if the market wants to top here and begin a decline to the 2900 region.

That is the primary count. It means a final 5th wave has completed a NINE month rally off the 3500ish low.

Within a context of a Bear Market, it means a 1327 point A Wave decline played out from January 2022 to October 2022 followed by a corrective B Wave advance from October to this summer.

A vicious C wave decline should follow to a minimum of 3180.

That is a Measured Move but C Waves are typically deeper than the A Wave.

So a C Wave could see 2700 to 2900.

I know it sounds crazy,  but I sounded crazy when I wrote on March 23, 2020 that the SPX should rally to 4000 over the next year.

Let’s take a look at an A B C Bear Market.

The last Bear Market produced an A Wave Decline from March 2000 to October 2002-March 2003.

It was followed by a B Wave advance into 2007 that actually struck a nominal new high over the 2000 high

The Vicious decline from October 2007 to March 2009 was a C Wave.

If an A B C is in progress I doubt we would breakout over 4525.

So the market is going to be very informative at 4500 and July.

This is how close the euphoria is to the thin ice in the middle of the lake.

What do we need to see to begin to confirm that a major top may be in place of that we are setting up a rally to much higher prices?

First I would want to see a top in this 4480 range and July…albeit we could theoretically extend to print 4500 and change.

Then I want to see breakage below 4450 to provide an INITIAL indication that a top has been struck.

Then we will have to very carefully analyze the structure of that decline.

If that structure is clearly impulsive, then we have an initial indication that we are seen the beginnings of a large C Wave decline.

However, if the next meaningful drop we get is clearly corrective in nature, then I must begin to consider that the next rally can point to 4800. If so that would occur in coming months.

It must be said though that not only is the structure of the SPX and IWM suggesting caution but the MACD  has been displaying negative divergences throughout the rally off the October lows.

This is a good reason why I don’t rely on indicators. They can be wrong for a long time.

They are not timing tools.

Indicators are derived from Price and Time and  Volume. They are of second degree magnitude---why not go right to the horses mouth…Time and Price.

The above are only clues as to determining the outlook.

Final determination must be driven by the price action and how the market handles support and resistance.

There is nothing more important in analysis.

In summation, while Time and Price point to 4480 and this time window, Euphoria can drive an extension..

As long as 4500 ish holds as resistance and we begin a turndown below 4450, then the nature, the structure of that decline will be my major clue as to the next trend in the market.

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