By: Jeff Cooper
Hit and Run Morning Stock Report: October 13th, 2022
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NR 7 Day At New Lows
Yesterday markets churned in a narrow range.
This is exemplified by an NR 7 Day in the SPX.
This is the narrowest range in 7 days.
These contractions in volatility are typically followed by expansions in volatility within 1 to 2 days.
And we have two catalysts to light the fuse on Wednesday’s NR 7 Day:
This morning we get the number du year in this inflation environment…the CPI.
Friday is the deadline given by the BOE on their “financial lifeline” to pension funds who are getting called by the Margin Man.
Wednesday’s NR7 Day was deceptive.
Despite the narrow range the market was anything but flat.
There was one 30 min stint where the SPX was up 5, down, 5, up 5, down 5 etc. after Fed minutes were release.
It’s as if every sentence of the Fed minutes triggered a different reaction for the Algomatics.
The bottom line is the square at 3590 we’ve been focusing on.
The SPX has been magnetized to this region…oscillating around it since it was first struck on September 30th.
The first drive to this level perpetuated back to back strong breadth thrusts that turned the 3 Day Chart up.
Be that as it may, the index was soundly rejected from its declining 20-day moving average leaving 5 consecutive losing days.
While Wednesday started out smartly, it was yet another fade job.
When the smoke cleared, the SPX closed meaningfully below the 3590 square.
That may be a prelude to Mr. Market taking a smash in the face before the weekend.
The above hourly SPX shows a well-defined triangle.
Often such triangles resolve with a false break out of the triangle-- one way or the other…but often without follow through in the direction of the breakout.
Then when price comes back in through the breakout point a yellow flag goes up on the potential for a false breakout.
When price actually breaks out to the other side of the triangle, I call this a Triangle Pendulum.
It can either be a Triangle Pendulum buy or sell.
In this case, given that we closed at a new low for the year in the context of a raging bear market, the normal expectation, should we first see a breakout above the top of the triangle, is that if price starts to reverse we could get a nasty plunge if we get breakage below the bottom of the triangle.
These Triangle Pendulum’s play out because for a trader there is no smelling salt like the thought of being “had” and trapped than that of a false breakout.
The scramble to right their wrong-footedness can be awesomely swift.
As I say, false moves lead to fast moves.
Coming in the context of new lows on the year in what may be the heart of a 3rd of a 3rd of a 3rd wave down may spook investors and traders alike today.
And, after all, there is a culprit that they may be able to point the finger at: CPI, if a waterfall starts.
Never underestimate traders inclination if they think they can connect the dots behind a move with news--
When in actuality you all know that the news breaks with the cycles not the other way round.
Otherwise, you would not be on this thread. You’d be trading off fundamentals rather than cycles of time and price-- ie, the Principle of Squares.
If a Triangle Pendulum plays out today, it would not be surprising to see a swift decline to the 3500 level of lore-- the 3500
50% retrace of the 2020-2022 range.
Despite another Fade and close at new lows for the year, there were some interesting upside reversals on Wednesday.
CHWY, NET, AMD and SNOW to mention a few.
As well, there were some notable “follow-throughs” such as UPST flagged on the private twitter feed.
Below the surface, however, the technical damage continues to be alarming.
464 NYSE issues made 12 month lows on Wednesday while just 8 made new highs.
In sum, if once the report is behind us, and the SPX closes at yet another new low for the year, we suspect that forced selling from margin calls and “voluntary selling” from the realization that SPX 3660 was NOT a bottom that was successfully tested may start a Selling Climax…ie the towel to be thrown in.
If so we’ll see acceleration in selling over coming days. Be that as it may, if we bounce first for a day or two, this will change nothing.
I believe the factors are in place for genuine capitulation that will take charge of the tape.
Yesterday’s NR 7 Day at new lows for the year may be prelude for a spike in volatility that could set a record before October is over.
But we are mindful that this Triangle could explode to the top side before capitulation.