By: Jeff Cooper

Hit and Run Morning Stock Report: September 6th, 2022

Will The Real Wave 3 Please Stand Up

The stock market is always delivering a message; the only trick is knowing how to read it.

The tools I use are the Square of 9 Wheel, trend lines and trend channels along with moving averages, and the 3 Day and 3 Week Chart.

I’m not big on indicators. Why? Because they are more descriptive than predictive.

This year I am looking at something I don’t recall ever seeing before: the market is deeply oversold and cannot sustain a rally attempt.

I was looking for a secondary high in mid-to-late August and the beginning of a dramatic wave 3 decline-- leg 1 down having ended in mid-June.

So far the drop from mid-August has been dramatic.

The SPX may have completed a little wave 1 down of a larger wave 3 last week when it tested a rising trend line connecting the June low and the July low at the 3900 region.

We got a sharp rally which I am counting as a possible A wave up of a 2 of 3.

That means that Friday carved out a B wave down of 2.

If that is correct a corrective wave C up of wave 2 will follow.

We may see a Pinocchio of the overhead SPX 50-day line.

The really important part of all this is that big Wave 3 down should be large.

The big deal is that the market is monumentally oversold right now.

What is it that sellers think they know and are front-running?

This brings me to RISK.

A Fibonacci 1.518% extension of wave 1 down is a logical target for wave 3.

It is a normal expectation.

As you can see below that normal expectation would result in a 2000 SPX point decline.

If you find this hard to believe then let’s just look at the minimal expectation.

A minimum expectation would be a decline that equates to wave 1 down (the leg down from January to June)-- 1182 points.

That equates to 3143.

One of my concerns is that the market is deeply oversold; however,  crashes can come from lows, not highs.

Let’s look at just how oversold this market is.

The chart below shows the NDX and the McClellan Oscillator in red.

Notice that it is much lower than it was in mid-June which was the last low for the market.

This shows more negativity now with the market much higher than it was at mid-June after a lengthy and much larger sell-off.

The chart covers just under three years, and the oscillator has only reached this level of oversold six other times.

The most oversold level was in March 2020 after the market’s historic crash of 35% in just over one month.

It is critical to note that the first three were during a bull market. The market went quite a bit higher after each of these signals.

It is a different story since the bear market began.

In sum, the bulls scenario is that mid-June was a big wave 4 low as part of an ongoing bull market from March 2009.

However, my cycle of work suggests otherwise, with downside pressure exerting its influence through October.

As well, the decline in 2022 have to overbalance any decline previous in the bull in terms of time.

Time is more important than price.

IF the June wave 4 bull scenario is correct, it means the rally into mid-August was a wave 1 up and we are in a wave 2 decline to be followed by a powerful wave 3 advance.

The bottom line is it should be easy to see which wave 3 is on deck.

We’ll play it close to the vest right here and let the tape tell the tale.

Whichever way it plays out we should be looking at around 900 to 1000 SPX points