Hit and Run Morning Stock Report: August 12th, 2022

By: Jeff Cooper

Gilligan’s Island

In my Hit and Run books from the late 1990s, I showed a strategy called Gilligan’s Island.

A Gilligan sell is a gap up to a new 60-day high with a close at/near session lows. (Reverse the rules for a Gilligan buy)

Thursday the SPX and the QQQ both left Gilligan to sell signals.

Interestingly, after gapping up, the SPX ran up just shy of kissing its declining 200-day moving average.

In so doing the index pushed above a 50% retrace of the 2022 decline at 4227.50.

Up 50 points at session highs, it looked like nothing could derail the SPX from a close over the 4210 Time/Price square-out flagged in this space on Wednesday when the SPX perfected a close at 4210 precisely.

To recap, 421 (4210) is 180 degrees straight across and opposite this week.

Yet, when the dust settled once again, the power of the Principle of Squares and the magic of the Square of 9 Wheel prevailed:

The SPX closed at 4207…below the 4210 square-out level.

You can’t make this stuff up.

So we have a technical trifecta:

1) A Gilligan reversal signal from a challenge toward the overhead 200-day moving average

2) A reversal from a 50% retrace of this year's bear market.

3) And the 4210 “square” exerting its influence for two consecutive days.

I think we need to be mindful of the action at this 4210 Time/Price square-out…especially as the SPX showed momentous momentum above 4210 and reversed to close below it.

As Hit and Run members recall, we had a Time/Price square-out at the June 17th low as well with 3636 being square mid-June.

Succinctly, the Square of 9 Wheel calls turning points like no other market tool on the planet. Period.

In sum, stocks came out of the starting gate on fire but burned out leaving Gilligan’s island reversal bar.

Thursday was a Pop and Drop.

This is only the second such bar in 2022.

Any guesses as to where the first occurred?

You got it. January 4th, the all-time SPX high.

Is it possible a Top & Drop like the one that occurred on January 4th is on the table here?

Downside follow-through will be the key.

If we get breakage below the 4050 region, the door is open to the downside.

Why? 4050 is a 3 point trend line from the June lows.

A violation of this trend line will trigger an Angular Rule of 4 sell signal.

If the rally off the June lows is a secondary wave 2 corrective rally, then a leg larger than the January-June decline is theoretically on deck.

The Rising Bearish Wedge shown in Thursday morning’s report backstops the idea of a powerful decline.

As noted yesterday, the first leg down ended on January 24th at 4222.85.

On Thursday, the SPX tried to reclaim that level but was rejected with authority.

There was a small change in the McClellan Oscillator Thursday. This is an indication that a large move is looming.

Remember the sequence of sevens we detailed early in the week where last week was an N R 7 Week (the narrowest range in 7 weeks) which also augurs for an expansion in volatility.

Finally, many leading names reversed on Thursday in the wake of powerful rallies reflecting that risk is rising.

Names include CHWY, BILL, NFLX, and BROS.

That said…it is not unusual in a strongly trending move or runaway move, to see the first sell signal squeezed.

As I like to say, the first mouse gets the squeeze, the second mouse gets the cheese.