By: Jeff Cooper
Hit and Run Morning Stock Report: October 31st, 2022
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Is It A Dead Man’s Party?
“Suppressing the rate of interest is a powerful way to boost an economy otherwise bound for recession, but it’s a dangerous one. It is to finance what opiates are to medicine, a distortion of perception disguised as a cure.” Adam Rowe
“The average SPX gain in 43 bear market rallies that are greater than 10% since 1929 = 17.2%, average duration 39 trading days.” Michael Hartnett
The June to August rally in the SPX was 17.4% in 41 trading days.
It did a good job of convincing many market participants the bear market was over.
The current SPX rally sports a near 12% gain in 12 trading days.
The June-August DJIA rally was apx 15.5% in 40 trading days.
Currently the DJIA has rallied apx 14% in 20 trading days or 10 days if you count it from the October 13th low which saw a morning undercut of the September 30th low leaving a Key Reversal Day.
So the current rally in the DJIA is a scorcher having covered almost the same ground percentage wise in half the time.
The SPX and DJIA secondary highs on August 16th kissed their 200 day on the nose before retreating.
The DJIA reversed after tagging its 200 day ma on Thursday leaving a Topping Tail or Lizard sell setup; however, on Friday it knifed through the sell setup like a hot knife through butter.
Yet, the SPX is well off a test of its overhead 200 day moving average on this rally.
This is due to rotation into cyclicals, industrials and pharma at the expense of techs.
It is a negative divergence.
For the most part, money managers can’t go to cash. They are paid to deploy funds.
So what often appears to be a bull run may in fact be a flight of rotation that generated momentum based on end of month performance concerns.
Let’s see what my Square of 9 Time & Price Calculator has to say about the DJIA first and then the SPX.
The DJIA low for the year occurred at 28,660 on October 13th.
Moving the decimal point we get 287 (rounding).
287 aligns with/vectors November 15th.
Because the mid-November is 90 days/degrees from the August 16th secondary high, this suggests a turning point in mid-November…either a high or low.
180 degrees straight across and opposite 287 is 323 for 3230.
Currently at 32,860 (328), the DJIA has cleared this 180 degrees up region with authority.
Unless this is a one/two day Pinocchio and the DJIA reverses back below 3230 in short order, it looks like it wants higher. Any pullback should find support at the 3230 region. If not, the door is open for lower prices.
A pullback may be on the table because October 28th (Friday) is opposite 328 for 3280.
The DJIA struck a high of 32,889 on Friday on a probe north of its 200 dma.
How about the SPX?
Let’s look at the structure of the rally in the SPX off the October 13th Key Reversal Day.
First of all October 13th was a very large range Key Reversal Day (A).
Range Precedes Price.
The SPX traced out a 1 2 3 Pullback to backtest its 20 day moving average on October 21st-- for a Holy Grail buy setup as well (B).
So October 21st had a Combo buy setup.
In fact, the setup was validated by October 21st leaving another large range outside up day-- an LROD or Lightning Rod.
That setup electrified the SPX higher as it turned its 3 Day Chart up on a kiss of its overhead 50 day line on October 21st.
This is where it got tricky because on Thursday night, following AMZN’s plunge, the SPY and futes plummeted
Below Thursday’s low.
In essence the after-hours trading left two consecutive daily lower lows (Wednesday and Thursday …post AMZN).
Consequently, because the SPX 3 Day Chart was pointing up (Plus One) and Thursday night’s action installed 2 lower daily lows (Minus Two) , a Plus One/Minus Two buy setup was perfected.
It didn’t look like the market would get upside traction after AMZN’s disaster with the futes down 30 points Thursday night, but by the time I walked to my turret, the market was flat.
The handwriting was on the wall.
If the market couldn’t go down on AMZN, on the heels of MSFT’s and META’s mess earlier in the week, then the likelihood is they were going up.
A 10 min SPX shows a persistent trend day following the first intraday pullback.
Net, net, the market appears to be rallying on ye old “pivot canard” once again.
One day there’s a “leak” by the WSJ, the next it’s by Blackrock.
The next day there’s a story from Reuters that no pivot is on deck.
https://pbs.twimg.com/media/FgP6fAYUoAIpq9c?format=jpg&name=medium
You think someone is “tampering” with the market?
The corner of Wall & Broad has become the corner of Cahoots & Shenanigans.
Well, there’s a lot at stake going into year end…and elections…
In sum, There may seem little reason to short the market here-- just as there seemed little reason to buy it when Hit and Run flagged A Low in mid-June.
In the context of a bear market, interim bottoms don’t send invitations announcing they have arrived, so to seldom do interim tops announce themselves with sirens.
Rather these pivots whisper to the technician with a method to determine the Primary Trend, The Intermediate Trend and the Minor Trend…albeit the lines may seem blurred to the most discerning eyes.
“Did you all just mishear a death knell as a starting gun?” Michael Burry
Could the SPX have rung a death knell on Friday?
Let’s drill down to an hourly SPX
The SPX has rallied to a trifecta of resistance:
1) Horizontal black line ties to well-defined Neck Line
2) Top rail of a blue trend channel
3) Red Ghost Line from the September 30th low
Many market watchers believe the SPX sports an inverse Head & Shoulders (bullish).
From my perch, I think there is a stronger likelihood for an inverse right shoulder if the index drops to the
Purple box on the far left of the chart.
This ties to the bottom rail of the blue trend channel as well as a backtest of the green declining trend line from the August secondary high.
Conclusion. While the SPX has clearly broken above short term downtrend (the hourlies), it shows 5 waves up to a converging trend line resistance.
Until proven otherwise, my take is that the mid-October low culminated wave 1 of 3 down.
Why?
If August 16th was the Secondary High, then it follows that the leg down from that high was wave 1 down of 3.
That means the next meaningful rally should be a CORRECTIVE wave (not the start of a bull).
It should be wave 2 of 3 down.
If correct, what follows is a powerfully pernicious wave 3 of 3 decline.
The battle lines are clearly drawn:
If wave 3 of 3 down is on deck, the SPX will shatter the 3576-3600 region marked on the above chart on the way to new lows.
Breakage below 3554 and then 3730 region and then the June low of 3636 will telegraph a Cascade below the 3490ish low of the year.
3490-3500 region marks a 50% retrace of the 2020-2022 range.
Markets seek equilibrium and the test of this region perpetuated a rally to 50% of the range from the August peak to the mid-October low of the year…an ideal spot for the SPX rally to be rejected.
This week is pivotal because trade above last weeks high will turn the SPX 3 Week Chart up for the first time since August.
This would be the 3rd turn up of the 3 Week Chart since the SPX ATH.
The prior two have defined highs prior to water-fall declines.
It is fitting that a 3rd turn up may mark the onslaught of a 3rd of a 3rd wave decline.
It is fitting that a high in this time and price region would also mark a 3rd lower high on the weeklies.
As W. D. Gann wrote, “Fast moves come from 3rd lower highs.”
Is The Street celebrating at a dead man’s party…just as it was on Halloween 2007?
