By: Jeff Cooper
Hit and Run Trading Morning Report - August 29, 2023
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Not All Breakouts Are Created Equal
“The soul never thinks without an image.”
On August 21st we looked at 3 patterns that led to debacles in the market:
The fall of 2021 through the fall of 2022
The boom and bust in 1987
In 1929 the market rallied around 7 days after it broke support. Then all hell broke loose.
In the last month we also reviewed the sharp secondary rally into the end of Augusts 2000 prior to a two to three year bear market.
In 1987 the SPX broke its 50 day moving average, backtested it and then rallied to reclaim it.
It was a short-lived “success”: the SPX knifed back below its 50 day moving average a few days later on October 6th, a rollover that became cataclysmic.
We also noted the pattern from 2007 when July 19th also marked a top as it did in the NDX this year.
In contrast to the above years, 1987, 2000 and 1929, the year 2007 saw a sharp drop in August.
That pulled the rubber band back for a nominal new high into October 11, 2007.
Is it possible we see a test of 4800 or even a nominal new high over coming weeks prior to a debacle?
In a word, yes.
Anything is possible in the markets. Our job is to ascertain what is probable.
In 1987, the rebound that recaptured the 50 day moving average was the largest one day point rally in history to that point in time.
Think about that. The largest one-day point rally occurred a few short weeks before the largest one-day percentage decline in history.
Can you say volatility?
We’ve all heard the old saw that the sharpest rallies often occur within bear markets and vice versa.
So it’s important to have tools to gauge whether a sharp rally like yesterday’s is in the context of a bullish or bearish overall trend.
Sometimes that’s equivocal.
Likewise, not all breakouts are created equal: the breakout over the SPX 50 day line in early 1987 was a false move. False moves often lead to fast moves in the opposite direction.
Likewise, the move to new high in early October 2007 was not the real deal.
“B Waves” can be false new highs.
They are typically unwound with waterfall declines.
These can be monster declines such as 1987 or slow-motion car crashes such as 2007-2008.
January 1973 was a false breakout that led to a 2 year bear market.
The breakout in OCTOBER 2019 into February 2020 was a B Wave to new highs that culminated in the Covid Crash. (A wave from SEPTEMBER to December 2018, B Wave advance into February 2020, C Wave crash in February/March 2020).
In sum, not all breakouts are created equal.
Yesterday the SPX “broke out” above its 50 day line.
It’s what it does with this breakout that’s going to inform us.
If it holds above it, especially following a backtest 4460-65) it opens the doors to the POSSIBILITY of a push to 4600 in keeping with the 2007 analogue in a September rally.
September/October rallies pay the piper. Think 2008.
Breakage back below the SPX 50 day moving average that sticks may be a blaring siren of a steep sell-off.
A failure below the 50 dma that breaks the Neckline around 4330 projects to the 4060 region.
There’s some good symmetry there as 4060 ties to where the entire advance off the May low.
That fits with a crash or crash-like scenario for this fall.
As the above daily SPX shows yesterday’s rally resembles the large rally day of June 15th.
Is it possible yesterday was the right shoulder of an H&S top to June 15th’s left shoulder?
The contrary is that subsequent to the consolidation after June 15, 2023, the SPX gapped up leading to a last ditch rally.
It’s going to be important to observe the 50 day line and the behavior over coming days.
This is an historic anniversary period.
The high in 1987 was August 25th.
The high in 1929 was September 3rd.
The secondary high in 2000 was August 31st.
These are 3 of the biggest highs of the last 100 years.