By: Jeff Cooper

Hit and Run Trading Morning Report - December 18, 2023

Why The SPX May Rally To 5219

The Roaring 20’s bull market began in August 1921.

The U.S. had just come out of WW1 and the Spanish Flu epidemic.

Remember the consensus that a new Roaring ‘20’s had begun in 2021 coming out of Covid?

Instead it was a major top in November 2021.

The Roaring 1920’s was facilitated by massive Fed easing of interest rates from 1920 through 1924.

However, from 1925 through 1930, the Fed aggressively raised interest rates.

Momentum carried the market higher into September 1929.

In Newtonian mechanics velocity of impulse and size (breadth in the case of the stock market) will cause the distance momentum travels to extend long after the impulse fades.

Like a car that’s going 70 miles an hour crashes well after it’s applied the brakes.

The Fed even raised interest rates for several months after the stock market crash of 1929---in fear of reigniting the speculative bubble.

But in early 1930, the Fed stopped raising interest rates.

It was THEN that the Great Depression began---not long after the Fed stopped raising rates.

The Great Depression lasted until the 1940’s when WW2 started.

The point is the timing of the start of the Great Depression was AFTER the Fed stopped their rate hike cycle.

Going back 100 years of Fed rate hike cycles a recession/depression started within a year after the Fed’s rate hike cycle ended.

Is this time different?

While it certainly looks like we got a blow off into late 2021/early 2022 validated by the “overbalance” of the 2022 decline in as much as it was longer than any prior decline since the 2009 low, there is an argument to be made that the October 2022 low was a Wave 4 low and that January 2022 was a Wave 3 peak.

This is supported by the fact that the October 2022 low held the bottom of a trend channel from the key January 2018 spike top and the March 2020 crash low.

Notice that connecting the January 2018 top and the January 2022 top and paralleling a trendline off

The March 2020 crash low gives you the October 2022 low.

The recent October 2023 low held nicely above this trend channel.

If the SPX rallied to the top of the mid-channel line (magenta) it could hit the 5200 region  around  this spring (5219 specifically).

The SPX below depicts the 1115 advance from the October 2022 low to the July 2023 high ( dotted blue line).

A 1115 point Measured Move from the October 2023 low points to 5219 (solid blue trend line).

Notice that both the blue lines are parallel.

I connected the two most important lows since the January 2022 all-time high.  These are the October 2022 low and the October 2023 low. I then paralleled a trend line off the July 2023 high.

Notice the convergence with the red Tops Line and the solid blue line at 5219.

Be that as it may a reversal is due. We have two big lows in October. The SPX rallied 7 weeks off the October 2022 low. It has rallied 7 weeks into last week.

Apart from the above technicals, 52 and 5200 are important numbers.

52 is a “natural” number. There are 52 weeks in a year. There are 52 cards in a deck.

52 years ago from 2024 is 1972. The market struck a major high on January 11, 1973.

2024 should be a momentous year.

52 months from the important early 2020 top is April/May 2024.

52 weeks ago the SPX rallied sharply from January 6th into February 2nd before declining sharply.

So on the one year cycle January is a big deal.

As offered above, a reversal is due.

The SPX has carved out another Rising Wedge, a typically bearish formation for the near term at least.

Notice the drop out of the July high also followed a Rising Wedge.

If the market produces a meaningful correction, the idealized band of support is 4350 to 4400.

Notice that 4350 ties to a trend linen connecting the October 2022 low and the March 2023 low with the recent October 2023 low looking like the Mother Of Bear Traps…especially given the explosion off those lows.

Notably, the SPX has never traded below a prior weeks low throughout the ramp.

It will be important to gauge the behavior on a turn down of the weeklies and especially on a weekly Plus One/Minus Two buy setup.

The next pullback will tell the tale as to whether we get a further melt up in 2024 to the 5200 region.

A big picture view from 2000 shows the structure for such a rise.

I connected the two biggest highs in the last 23 years. These are the Q1 high in 2000 and the Q1 high in 2022.

Notice the parallel channel from the 2009 low that hits a series of lows over the last decade.

The Tops Line points to the 5200 region as well where an A B C D E pattern would be satisfied.

The key going forward is going to be the Bottoms Line (black) from the March 2020 low.

Breakage below that pivot suggests the top is in.

Notice the pivot ties to the aforesaid 4300-4400 in Q1.