Hit and Run Morning Stock Report: August 8th, 2022
By: Jeff Cooper
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Why This Is An Important Week
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” Seth Klarman
Friday morning’s Hit and Run Report walked through what I see as a historic volatility coil.
One factor pointing to an expansion in volatility was Thursday’s exceptionally narrow range.
On Thursday the SPX range was 25 points leaving an NR 7 Day.
An NR 7 Day is the narrowest range in seven days. Typically these contractions lead to an expansion of volatility in a day or so.
Interestingly, Thursday was also the 7th trading day up from our continuation buy signal on July 26th .
W D Gann wrote to look for turning points on the 7th day, week, and month.
Last week was also the 7th week up from the mid-June low for the year.
August is the 7th month from the SPX January all-time high.
As it happens, Thursday also carved out the narrowest range day for 2022 in the SPX.
As well, last week was an N R 7 WEEK in the SPX.
Not only was it the narrowest range week in 7 weeks, but last week has the distinction of being the narrowest range week of all of 2022.
You can’t make this stuff up.
So we have a “volatility coil” squared, so to speak.
The NR 7 Week from late December did a great job of telegraphing the ensuing volatility.
The current “coil” is occurring as the SPX may be tracing out a Pinocchio of its 20-week moving average.
A Pinocchio occurs when an index (or stock) pushes marginally above an important moving average or trend line but it turns out to be a lie.
Friday, I showed an NDX from 2021 depicting how a trend line connecting the two most important lows on the chart from March 2021 through March 2022 (so excluding the price action subsequent to April 2022) intersected with a trend line connecting the two most important highs in 2022. Those are the early January high and the late March high.
An intersection of these two trend lines occurred Thursday at 13,311.
In Friday’s report, we wrote, “there is reason to suspect this 13,311 NDX region is quite pivotal.
Moving the decimal point to work with the Square of 9 Wheel we get 133.
133 aligns with/vibrates off August 8th.”
The NDX gapped lower on Friday-- below its 20-hour moving average, a short-term measure of support.
It rebounded somewhat to close below the 20-hour ma at 13,207, below the aforesaid “133” potential square-out region.
The SPY opened on its low on Friday near the 410 strike and bounced toward the 415 strike before settling at 413.50.
A daily QQQ for the year shows a first wave or leg down in accordance with our cycle projection followed by is believed to be a counter-trend rally.
This counter-trend rally is tracing out an A B C structure.
Some technicians/traders may assume that because the C wave is significantly larger than the A wave that the structure is actually impulsive versus corrective.
However, long-time readers will recall that throughout the rally after the breakout in the 4th quarter of 2019 I was convinced it was a corrective B wave…despite the new all-time highs into January/February 2020.
We did not waiver on our forecast that a C wave crash was around the corner well before Covid hit resulting in a waterfall decline.
See monthly SPX chart from Sept 2018 through March 2020 here
That was an A wave decline into Dec 2018 followed by a B wave CORRECTIVE rally into Feb 2020.
The structure was corrective despite the new highs.
Likewise, the current structure of the rally off the June lows appears corrective-- despite the long C wave since the July 14th Trap Door buy signal.
In sum, the SPX has panicked up to where it panicked down in early June.
Bear market rallies appear out of the blue and end just as quickly.
The index should finish a C wave rally for an A B C top as early as this week.
It is possible the C wave will carry toward 420 SPY.
420 is opposite August 11.
That said 400 is square August 11.
A pullback to the 400 region should find short-term support while a rally to 420 could see an important top and drop.
Given the Volatility Coil on the dailies and the weeklies, is it possible both 420 and 400 can be seen this week?