By: Jeff Cooper
Hit and Run Morning Stock Report: November 14th, 2022
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“Inflation appears in spikes. When the spike is resolving, it won’t be because of Biden or Powell. It will be because that is the essence, the nature of inflation. It resolves, fools people, and then comes back.
When it comes back, neither POTUS nor the Fed will take credit.” -Michael Burry
In medicine, they call it pre-existing conditions.
In the markets, we have pre-existing beliefs.
These pre-existing beliefs influence our risk tolerance.
Much of what your pre-existing beliefs are will determine what your posture is toward the market for this important week and for 2023.
Allow me to explain.
Since October, Hit and Run has been pointing to mid-November and 4100 SPX as an upside projection.
I used Ghost Lines to get this projection.
A Ghost Line is a trend line that is lost in the past price action; but brought forward in time, often exerts its influence.
We flagged Ghost Line support at the early November low in this space 300 SPX points ago.
On Friday the SPX struck 4001. With the 200 day moving average at 4080, and momentum in full swing from Thursday/Friday, it may look like a clear shot to our 4100 region with this week being mid-November.
Maybe, but not so fast.
Why the hesitation?
There is a SPX/SPY Time/Price square-out at 399/400 (3990-4000) and November 11.
In addition there was a QQQ Time/Price square-out at 288 and November 11.
Because we have (at least) two square-outs, the Rule of Multiples applies.
This means that there is a greater likelihood of a turning point on deck.
Perhaps the market pulls back here and then pushes higher mid-week.
But we must respect that according to my Square of 9 Wheel the SPX has already struck a high in league with the aforesaid square-outs.
There are other factors lining up suggesting a turning point:
1) This week will be a geometric 90 days/degrees from the August 16th secondary high.
2) Tuesday is a Bradley Model turn date.
Biden meets with Xi today. On Tuesday we get the PPI.
As I say, “the news breaks with the cycles, not the other way around.’
The structure below on the SPX shows big bearish potential.
It looks like the index put in a Wave 1 low in June with the rally into mid-August marking a corrective Wave 2 high.
If so the decline from the August peak marked the first wave down of a Wave 3 decline.
The presumption is that Wave 2 up of 3 down is in play since the October 13th low.
The above daily SPX shows 3 Overbought Oscillator sell signals subsequent to the January all-time high.
The first occurred in late March with the SPX probing above its still uptrending 200 day moving average.
The second occurred in mid-August with a perfect goodbye kiss of a now downtrending 200 day moving average.
Currently, we have another Overbought Oscillator reading well below the SPX 200 day moving average.
It looks like a study in lost momentum in successive tests of a 200 day moving average that is rolling over.
Interestingly, each Overbought Oscillator reading is synchronous with a turn up of the 3 Week Chart.
If my interpretation of this pattern is correct, a powerful Wave 3 of 3 decline is at hand.
A daily DJIA shows that it has been leading and has exceeded its 200 day moving average,
In so doing, it is also testing a declining trend line from February.
The DJIA shows an alternate but none the less potentially nasty structure.
If the mid-June low marked a big Wave 1 low in the DJIA, it may be tracing out a major A-B-C Wave 2 upward correction…prior to a carpet pull.
In this scenario, the rally to mid-August was the A Wave with the undercut low in October the B Wave.
If so then the C Wave rally is in progress and culminating.
The question is whether we have a negative divergence between the DJIA and the lagging SPX and NAZ or whether these two indices will play catch-up?
Be that as it may, breakage in the DJIA below 32,500 opens the door to lower prices.
In sum, we have some decisions to make this week. And, these decisions will impact our posture going into 2023 ultimately.
But, first what happens at this SPX 4000-4100 region and this time-frame is critical.
We are in the wheelhouse of the Bull/Bear Maginot Line.
Either the market is going to have the proverbial year-end rally back-stopped by the post mid-term election history or it’s going to melt down.
Bulls are quick to point to the bullish market behavior after mid-terms but forget to mention the crash into Christmas in 2018.
It must be said that this November is 7 squared months from the beginning of a crash in October 2018.
It is not lost on Hit and Run members that January 2022 is 7 squared years from the major top in January 1973.
Let that soak in for a moment while you’re in the FOMO Jacuzzi.
After 2000, the NAZ rallied 20% off its lows SEVEN times as it fell 78% to its 2002 low.
Keep in mind the drop from 2000 to 2002 was an A Wave decline followed by a false Overthrow B Wave rally high in 2007. A ferocious C Wave decline followed into 2009.
Following the secondary high in April 1930 the market saw many hope-filled rallies prior to the bottom in July 1932.
Conclusion. Following on the heels of last weeks wave of FOMO, the last thing most market participants are expecting is a meltdown from here.
However, the psychology of third waves is that they come when the vast majority of market participants is least prepared.
Just like the option wipeout last week.
“Clearly the market is in the midst of a year-end rally.”
Who would be dumb enough to throw money into bearish put positions here for a new leg down?