By: Jeff Cooper

Hit and Run Trading Morning Report - September 25, 2023

The Hunt For Red October….Surfing The Tsunami

There are two reasons why the market could stage a rebound… possibly a sharp rebound over  the coming days.

1)      431 for 4310 squares November 23rd. Friday was November 22 and the SPX struck a low of 4316 while the SPY hit a low of 430 and actually closed below 431 at 430.42.

Monday is going to be important: if we’re going to get a bounce it should be from here.

2)      On Friday, the market passed through the Gann Panic Window. We have exited the 55/56 calendar day count from the July 27th SPX high.  That does NOT guarantee we have hit THE low; it may be A low as there are larger cycles potentially exerting their downside influence this thru October and into November.

As well, by some measures the stock market is now SHORT-TERM oversold.

To walk off this oversold condition, the stock market could easily bounce higher this week.

However, market crashes typically occur from  severe oversold conditions… when the market can’t get traction.

So it is not a foregone conclusion that stocks move much higher this week simply because they are oversold.

That said, a Snapback to as high as 4400 changes nothing.

While a Composite Advance/Decline Line has plunged and is approaching its Oct 2022 low (obviously a critical support level that could be violated within a few days), this A/D Line RELATIVE to the Composite Oscillator which often is an important leading indicator of market direction is at an extremely high level comparable to the levels in Jan 2018, October 2018, November 2021 and June 2023.

These warned of significant market declines.

To be at this reading despite having declined meaningfully from July 2023 is a serious concern. The current reading has extremely bearish implications.

We are nowhere near a low.

From a sentiment perspective, the 5 week average of Investors Intelligence bulls/bears and the 5 week average of AAII bulls/bears indicate that while sentiment is beginning to shift from extreme bullishness to extreme bearishness, we are not there yet.

The decline has been orderly. Despite having declined in the Gann Panic Window, there is no fear or capitulation.

That should change before the end of October.

Keep in mind October is 90 days/degrees from the  July high.

Also it must be said that the SPX crashed in 1987 after gapping below its 200 day moving average.

IWM, The Truth Teller, knifed below its 200 day moving average on Wednesday and gapped down on Thursday.

Remember the charts I showed last week on IWM project to 171/172.

That does not mean that’s THE bottom necessarily.

Arguably below 171/170 opens the door to the 127 region.

Now that’s a knife.

Why are investors complacent?

The market raged back after the 2009 low for 12 years. Every multi-week/multi-month sell off was a buying opportunity.

The market rocketed higher after a 3 week crash during a pandemic in 2020.

In short, the market has been The Comeback Kid in spades.

Currently the ratio of Treasury bond yields to Junk bond yields has hit a record high.

This indicates investors believe a recession is unlikely anytime soon and that junk bonds are now safer than any other time in the last 30 years.

They are misguided. Their belief will be shattered before the end of 2023 if not by the end of October.

Signs Of the Bear permeate:

1)       10 year Treasury bond yields moving to a 16 year high increasingly constrains economic activity.

2)      Retail investors soaring holdings sin Money Market Funds shows that Certificates Of Deposits (time deposits) continue to be withdrawn at an aggressive pace. Renewed weakness in the NAZ Bank Stock Index as well as Bank of America and Citigroup indicate both small and large banks are in trouble.

3)      Exacerbating banking problems, recent reports reveal that credit card delinquencies are rising rapidly.

4)      After a long pandemic pause, student loan repayments are now due for all borrowers beginning in October. This will further slow economic activity in October.

5)      Sharply rising oil prices are already dampening economic activity.

6)      The UAW strike on automakers.

7)      Looming government shutdown. Analysts are likely to lay an expected crash at the doorstep of politicians. This can further psychologically impact markets although the actual “cause” of the crash will be related to factors such as excessive valuations, extreme financial leveraging and an economic contraction…the speed of which the contraction is coming will be a shock to most.

8)      Weakness in the IPO market in ARM, CART and KVYO lays bare the lack of risk appetite.

9)      China’s real estate market is unwinding continues in tandem with a massive collapse amongst small-cap companies in China.

There are a number of ways the pattern of a crash can develop over the coming weeks.

Above we stated that 431 (4310) squares September 22….So Friday/Monday.

At the same time the 3490 low (349….the October 13, 2022 low) squares October 11th.

Is it possible a crash will see the SPX drop to 3490 into/around October 11th near the 1 year anniversary of the low?

In sum, 360 degrees down from the SPX July 4607 high is 4338.

This level ties closely to the above 4310 region.

This is a logical place for the market to stage a rebound…IF IT’S GOING TO.

Surprises happen in the direction of the trend. Shocking surprises can happen in the direction of accelerated trends.

Sustained breakage below 4310 opens the door to 4208 which is 540 degrees down from the July high.

Where does a crash point to?

Below 4208 last ditch support opens the door to another 540 degree drop to 3584.

This is very close to the October 2022 low.

The low close for the bear market in October 2022 was 3577 on October 12th.

The October 2022/March 2023 bottoms line is around 4250 this week.

This ties to the aforesaid 4208 region.

Weakness below this area indicates an epic crash is likely on deck.

Key dates for Air Pocketism look like October 5/6 and October 11.

3490 (349) squares October 11th…with an eclipse on October 14th.