By: Jeff Cooper
Hit and Run Morning Stock Report: September 1st, 2022
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The Method That Called this Leg Down
Yesterday’s report indicated that, despite the oversold nature of the market, we could still expect Wednesday to see another sharp decline.
It was an extremely choppy session, with many rally attempts from the key 50% retrace of the June/August range (3981) but the runoff saw the market get hit hard with the SPX knifing and closing well below 3981 at 3955.
The die was cast when another “fade” rally was rejected just below our key 4020 level-- key because it is an important 1080 degrees down from the 4818 ATH.
The SPX looked like a heat-seeking missile to the rising trend line connecting the June/July lows (purple) which comes in at 3900.
And, accordingly, selling pressure carried over to Wednesday evening with the futes down as much as 30 Wednesday night.
The power of this decline is borne out by the NYMO at new lows for the year and the heavy volume to the downside.
But, what forecasted this downside momentum was my Minus One/Plus Two Sell Method.
The SPX went “into the position” -- this Minus One/Plus Two sell position on Friday morning’s rally.
The quick Jackknife to the downside (on Friday) underpinned the selling momentum to follow.
Allow me to explain.
The 3 Day Chart turned down on August 23rd (blue arrow) with 3 consecutive lower daily lows (intraday…not necessarily closing lows).
When the 3 Day Chart is pointing down, this is the Minus One part of The Method.
Then, with the 3 Day Chart pointing down…anytime you get 2 consecutive higher daily highs, that satisfies the Plus Two part of The Method.
That happened by the slimmest of margins on Jackson Hole Friday (black arrow)
The immediate, unrelenting selling from this pattern underscores its power: the quicker the setup plays out the more pernicious it likely will prove to be.
This is exactly what has played out.
What do I mean by that?
Well, Friday’s reversal took out the prior 3 Day Chart low and the red trend line from the June low.
The difference between the red trend line and the purple is that I have been using the red one to define the short-term trend since mid-July as we suspected the mid-July low was a Trap Door-- a false undercut.
However, breakage below the red trend line puts the purple trend line on the table.
In sum, Wednesday was important because we went lower despite being severely oversold. Near term washouts come from oversold markets that cannot rally and turn lower.
Wednesday’s decline also breached the 50% retrace and gave a SECOND close below the widely-watched 50 day line (not shown).
A decline below the 3900 region puts the market in the danger zone.