Treasure To Trash, Trash To Treasure-- A Big Move Is Coming

Mean Mr. Mean Reversion is in full swing on the tape.

Winners are getting hit while the weak are rallying.

For example, CAT is down a quick 16 points in three days and  FSLR is down 20 points in three days while

META rallied 5 points in Thursday’s market downdraft and CRM rallied 3 ½ points off its opening low.

When the Santa Claus Rally didn’t show up, elevated tax selling exerted downside pressure.

But in the new year, several of last year's winners are seeing profit taking while many of the growth glamours that got hit with tax selling are showing better relative strength.

This is one of the dichotomies dominating the current market providing the tension on the tape.

The other is that the options market is really leading the stock market as big firms try to squeeze dimes out of nickels in the bear market.

It is a ‘tail wagging the dog’ environment where the players are using any of the massive amounts of speculative vehicles available.

Generally, we see ETFs on indexes, but now there are ETFs and ETPs (Exchange Traded Products) on individual stocks.

TSLQ, for example, is an ETP on TSLA.

My point is that in 1929, the prior top on the 90-year cycle, there was also a great deal of speculation and speculative vehicles available. At that time, it was “bucket shops” that offered the opportunity to take leveraged risk. Now vehicles are rampant.

Another dichotomy is that there is a lot of cash flow out of funds, both equity and debt.

The idea may be that investors are now sitting on a lot of cash, so that could be bullish if it is put to work.
It could. But, we should also consider that players may have been selling because they need cash and the funds they have removed from the market may remain removed.

They may not have excess cash to put in the market due to 1) higher rates and 2) inflation with goods costing more.

The funds that have been removed from the market may remain “removed.”

At the same time, the Fed appears to be taking a more hawkish stand irrelevant of “slow-down” news this week.

In other words, there’s a dichotomy between Bad News Bulls and Bad News Bears.

Bad News Bulls think the uglier the economic news gets, the sooner the Fed pivots.
Bad News Bears believe the bad news is the tip of the iceberg.

Within the context of the current dichotomies, I  understand there are a huge number of options that will expire on today’s first monthly Opex of 2023.

What do the charts say?

Here is an updated SPX from yesterday showing the Ghost Lines extended from the triangle that so many assumed was a Bear Flag that would usher in a dramatic decline.

The SPX followed through yesterday from Wednesday’s downdraft holding a 50% retrace  (3890)of the December low to the January high.

The  Ghost Lines emanating from the purple triangle intersect next week.

In yesterday’s report, I thought they pinpointed today.

The SPX is in the Plus One/Minus Two buy position at a 50% retrace.

Why?

The 3-Day Chart is pointing up (3 consecutive higher daily highs) and we now have two consecutive lower daily lows.

These are always taken on an intraday versus closing basis.

At the same time, the SPX has backtested its RISING 20-day ma for a potential Holy Grail buy signal.

Be that as it may, the index has its work cut out for it: the 50-day ma overhead presents resistance…as does the 3950 square.

Note the downside acceleration off the 4013 square (360 degrees up off the December low and the acceleration on breakage below the 3950 square (270 degrees up from the December low).

The bottom line is breakage below the purple ellipse at 3860 likely opens the door to a drop to 3600.

Below is a daily DJIA with a trend line from the October low broken.

As well it shows a Breakaway Gap below a rising trend line (purple) from the December low.

Notice the Broadening Top that broke and was tested five days ago.

A big picture monthly DJIA shows it turned its 3 Month Chart up in December (3 consecutive monthly higher highs), green ellipse.

If the market is bearish, this will define a high.

Clearing and holding this pivot at around 34,600 opens the door for a run to all-time highs.

Notice how the DJIA found support at the pre-crash Covid highs from February 2020.

Prior resistance acted as support-- at least on the first time down.

In the near term, the low of the red ellipse where the 3 Month Chart turned down is a downside support region. This may act as an inverse right shoulder.

Finally, let’s look at The Truth Teller, IWM dailies.

Notice the red horizontal pivot line.

Currently, there are triple tops overhead which IWM is pulling back from.

Breakage above this 188 region will trigger a Rule of 4 Breakout.

Given the significance of this pivot going back to early 2022, a breakout is likely going to seal the deal for higher prices-- especially with a possible double Head and Shoulders inverse pattern since last May on the table.

The Truth Teller has support in the 180 regions.

The above inflection points take on added significance given the recent highs came in 90 days from the October low.

The end of January is 60 months from the Air Pocketism from January 2018.

A big move is coming.