By: Jeff Cooper

Hit and Run Trading Morning Report - August 22, 2023

It’s A Rembrandt

Last week, the Wall Street Journal reported China could be approaching a Lehman Moment.

Yesterday we showed the similarity between the waterfall crashes in 1929 and 1987 and the slow-motion train wreck in 2022.

Now let’s compare the slides following the tops in 2000 and 2007.

Since the Wall Street Journal is warning of a Lehman Moment let’s start with 2007, the high that preceded the Lehman debacle in September 2008.

We’ve noted recently the similarities between 2007 and 2023.

Both years had mid-March lows.

Both years had highs on July 19th.

In 2007, the market dropped hard into August 16th.

This year it sank into August 18th. In 2007, the SPX rallied to its 50 day line and reclaimed it convincingly perpetuating a nominal new high on October 11th.

That was The Top.

This is in contrast to the patterns from 1929 and 1987 when the market rallied to Pinocchio its 50 day line and rolled over…hard.

Let’s take a look at the year 2000.

In 2000 the SPX carved out a secondary rally from April/May into the end of August/early September.

Indeed the secondary high was on September 1st, near the anniversary of the September 1st, 1929 peak.

At the end of August 2000, Hit and Run, assuming the return rally was a test failure of the March high, stated that “the most speculative area of the market, the NAZ, was as vulnerable as the DJIA in early September 1929.”

The NAZ dropped more than 80% over the next few years mirroring the drop of the DJIA into 1932.

The Bear Market from September 2000 started with a Rule Of 4 Sell signal on breakage below a 3 point trend line.

Importantly, notice that following the Rule Of 4 Sell the SPX had a one day Snapback that backtested the trend line. The rest as they say was history.

So assuming the path is down, there is an alternate scenario to a collapse in September.

The 2007 pattern allows for a possible push into October.
This will depend upon the behavior if and when the SPX rallies to its 50 day line.

My expectation is that the 50 day moving average will act as resistance if the SPX pushes that high, a Pinocchio notwithstanding.

Below is a daily SPX from October 2022.

I connected the October low and the May low (blue line).

I think this is the operative Bottoms Line because of the multiple hits in May.

As well, this Bottoms Line defines the level where the blow-off started in late June (red arrow).

Notice that the SPX declined to the blue Bottoms Line on Friday and bounced and continued higher on Monday after a head fake into the red.

If the pattern follows the 1929 and 1987 examples, the SPX could rally up to its 50 day line near 4460.

This ties to the upside gap on July 12th (black ellipse)… where the SPX accelerated after triggering a Jump The Creek sell thru that open gap.

Additionally, a rally up to this 4450-4460 level could instally the right shoulder of a Head & Shoulders top pattern.

The purple horizontal line is the Neck Line of this potential Head & Shoulders pattern.

If broken it projects to the 4075 region.

This ties to a trend line connecting the October and March lows.

Pulling back the lens to show the price action from the SPX ATH filling in the 50 day line shows this perfected picture if the SPX should snapback to the 4460 region.

It’s a Rembrandt.

The red band is the support region.

If this setup plays out, the potential is for at least a 10% drop.