By: Jeff Cooper
Hit and Run Trading Morning Report - August 2, 2023
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Fibonacci Air Pocket
Since May we have seen enormous dispersion in the stock market, ie. a wide range of outcomes in stocks versus the monolithic melt-down in 2022.
Many stocks have seen significant beta since May 2023---returns far outpacing the benchmark, the S&P 500.
Equity markets have shrugged off a litany of well-founded concerns these past several months such as:
1) Surging oil prices
2) Still percolating inflation
3) Geopolitical risk
4) Stubbornly high and recently rising yields
5) Inflated valuations against relatively high yields versus where stocks were with lower yields at the late 2021 peak.
6) China-US decoupling risk
In so much as market participants have ignored these risks, that in and of itself has naturally fueled market optimism.
The longer this “altered state” persists, the more it may have reduced uncertainty and reduced volatility.
The conclusion by many on The Street is that this in turn has perpetuated the hope for a soft landing, underpinning a leg to new all-time highs.
Hence, it is tempting to believe that the second half of the year will mimic the first half especially as July has seen the popular indexes push to new recovery highs.
The lack of a more than 1% move in months on the SPX reflects the convergence of “smooth-sailing” narratives---extrapolating the performance of the last four months into the end of the year.
Extrapolating price behavior is Wall Street’s favorite pastime.
Yes the trend is your friend, but only until the end when it bends.
The trick of the tape is determining when pullbacks that have been bought more and more urgently turn into an uptrend that is bending.
When does a hyperventilating tape turn into buying exhaustion?
The SPX left a large range Key Reversal Day last Thursday and has traded inside Thursday’s range for 3 days now.
The dailies turned up on Monday and the index turned the dailies back down yesterday.
Breakage below the 4500 region opens the door to a possible waterfall to the 4000 region.
Is there a trigger?
After the close, Fitch downgraded the US credit rating, saying they lost confidence in the government’s fiscal management.
The cost of money rises and confidence is lost in the system.
Gold rises when confidence in government is lost.
On Friday August 5th, 2011 Fitch downgraded US debt.
The SPX fell from 1200 to 1119 in two days a 7% plus drop.
A similar decline now amounts to a drop to 4240 ish, the Breakaway Gap on June 2nd.
Breakage below 4240 opens the door to a return trip to the 4040 May 4th low.
Can history repeat?
Maybe something, maybe nothing but this week is 144 Fibonacci months from early August 2011.
In addition, August 9th is 144 Fibonacci days/degrees from the March 13th, 2023 low.
As well my Time & Price Calculator shows that 401 (SPY) squares out with August 9th.
The current rally started with an outside up week the first week of May.
The first week of August is a natural 90 day/degree cycle from the first week of May so we are at a potential inflection point.
And, it’s not a low.