By: Jeff Cooper
Hit and Run Trading Morning Report - October 23, 2023
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A 100-Year Flood
“It’s on America’s tortured brow that Mickey Mouse has grown up a cow.”
-Life On Mars? Bowie X Aurora
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
Since July, Hit and Run has warned about the Time/Price synchronicity and pattern parallels with 1929 and 1987.
Our report the morning after the July 27th top was titled, The Bigger the Top the Bigger the Drop.
The SPX has shed 350 points since then.
We followed up in September with, This Thing’s Gonna Crash.
Last week’s Wednesday, Thursday, Friday plumb-line drops are an uncanny and eerie reminder to the 3 day selling spree prior to Black Monday, October 19th, 1987.
Now that this historic rhyme has found a small choir among market pundits and participants the refrain seems to be now that it appears to be “front and center” a selling avalanche won’t happen because a “watched pot never boils”.
“They” say the market doesn’t crash when everyone is telling you the market is going to crash, but often the crowd is correct. That’s what makes trends.
After all, the massive shorts in the bonds have been right for months.
As friend and fellow trader Don Meade points to Yogi Berra’s iconic saying, “Nobody ever goes there anymore---it’s too crowded.”
Crashes are a rapid transformation of investor psychology from greed to paranoia…from buying corrections to paranoia.
This transformation may be especially abrupt at the current juncture because the Fed has fueled a buy the dip mentality with their easy-money ZIRP policy since 2009.
Their pouring trillions into the system during the Covid pandemic only fueled a free-money bonfire of the equities fostering the belief that if the market can rocket from the abyss of a pandemic, every pullback is surely a buying opportunity.
The tremendous bounce off the seasonal October trough in 2022 perpetuated this belief among many market participants. Led by NVDA hitting a new all time high, the AI mantra was chanted by the bulls like capitalist Hare Krishan’s in a conga line--- making the rally from March look like a it was a corrective low in an ongoing bull market.
However, it was never a bull market.
A monthly SPX from the 2009 low shows the sell-off since January 2022 “overbalanced” all prior corrections in both time and price.
In other words the drop from January 2022 to October 2022 was greater in price and longer than any sell-off since the March 2009 low.
For example the Covid Crash was 1201 points while the 2022 decline was 1327 points.
Friday was a pivotal day for three reasons:
1) 1) the SPX turned its 3 Month Chart down by making 3 consecutive lower monthly lows.
This is a rare bird. The black arrows on the above chart point to the months where this has occurred. Neither the crash in 2018 or 2020 saw the 3 Month Charts turn down.
The turn down in 2010 defined a low. Ditto 2016.
The 3 Month Chart turned down in June 2022 eliciting a bounce with an undercut low in October 2022. Consequently October 2022 marks the circled 3 Month Chart low.
The 3 Month Chart turned back up in June 2023 and the index struck a high one month later.
When the market is bearish a turn up in the 3 Month Chart will define a high soon.
Now the 3 Month Chart has turned back down. Importantly it turned down as soon as it could have…meaning in the 3 months following the July peak.
2) The other pivotal factor on Friday is that the SPX closed below its 200 day moving average on the Friday weekly close. Breaks of the 200 day moving average in the 4th quarter often times see further selling…be it an escalator or an elevator, such as occurred in 1987 and 1929.
Notice the breakage below the 200 day moving average in 1929 and 1987 in the charts below versus 2023.
3) A daily SPX shows the SPX triggered a Rule of 4 Sell on Friday.
Why? It broke below a 3 point trend line connecting the October 2022 low, the March 2023 low and the early October 2023 low. It tested the trend in early October but it looks like the second mouse is getting the bear cheese.
The test of this trend line in early October elicited a rebound.
That rebound carved out two consecutive higher weekly highs.
It also left a weekly Holy Grail sell signal in backtesting its 20 week moving average.
Hit and Run members know that with the 3 Week Chart pointing down at that junction (having satisfied two consecutive higher weekly highs) a Weekly Minus One/Plus Two sell signal was on the table.
The SPX rolled over immediately tracing out last weeks large range outside down reversal bar.
These are all signs of the Bear—signs that indicate July 2023 was the top of Intermediate Wave 2.
The angle of attack to the downside is consistent with a powerful Intermediate Wave 3 decline.
That means the October 2022 low will not hold.
There is a Head and Shoulders outstanding projection to the 4070 region.
At the same time early this week is 180 degrees straight across and opposite 405 (4050).
In sum, as offered in early October the 5 year cycle is pointing down into the end of the year and the news has not broken with that cycle, ie. markets have not discounted breakout of violence with other actors entering the war as well as attacks on U.S. assets throughout the Mid-East as well as the potential for terror attacks in U.S. cities.
This is just one of a confluence of cycles. The 90 day/degree cycle points to late October, 90 degrees from the late July high.
Late October is the anniversary of the 1929 crash.
There are powerful natural cycles that should exert their downside pressure in November.
The takeaway is that whatever happens in October may be just the prelude to November negativity.
Another important read: Why the SPX Can Hit 4,000