By: Jeff Cooper

Hit and Run Trading Morning Report - December 21, 2023

When FOMO Turns To MOFO

“You tell lies thinking I can’t see”
-I’m Down, The Beatles

“Clearly the market is so far out over its skis that the largest pullback since the October low could come at any time.”

We wrote the above in Wednesday morning’s Hit and Run Report.

Markets turn on a dime. Most traders cannot.

We’ve been pointing to “at any time as a top on Dec 18/19.

Here’s why.

1)      475 (SPY) is 180 degrees straight across and opposite December 18.

The SPY pushed to 475.89 on Wednesday before reversing 2 hours before the bell.

2)      We sent an alert on the private twitter feed that an Opening Range Break (ORB) opened the door to 4700. This ties to the July high. Since prior resistance often acts as new support, the presumption was a reversal could see Airpocketism to 4700.

3)      The reversal was signaled by a Late Day ORB. Given the parabolic, unrelenting runaway move, once downside momentum erupted late in the session, bulls kept their wallets on their hips as profit takers ran for the exit. When the late day upside squeeze that’s been a hallmark of the rally failed to show up the selling riddled the tape.

4)      In addition to the 475/Dec 18 Time/Price square-out, December 19th is 144 Fibonacci days from the July 27th high. A reaction was due and it struck like a thief in the night.

144 is a natural square, 12 X 12.

5)      As well, we’ve been pointing to resistance defined by a Ghost Line---powerful because it coincides with the region of prior all- time highs.

6)      Also suggesting caution going into the above factors warranting caution is that the SPX was in the monthly Minus One/Plus Two sell setup. This is because the 3 Month Chart is pointing down (-1) followed by 2 consecutive monthly higher highs (+2)

The SPX extended when it went into the Minus One/Plus Two sell position on trade above 4588 this month. This suggests the index will likely turn its 3 Month Chart back up in January.

It will be critical to observe the price action after this occurs in January.

Tuesday, we posted on the Hit and Run Private Twitter Feed that 470 SPY puts for Wednesday, December 20th were “flier” buys.

They were 15 cents.

They got as low as 2 cents Wednesday afternoon before the tumble started.

They exploded to $1.25.

In sum, 4700 acted as a magnet when the nose dive kicked in producing a Key Reversal Day…. Mirroring the pattern at the July 27th peak.

Moreover, 90 degrees down from Wednesday’s 4768 high for the move is 4708, basically the July top.

The SPX closed below that level at 4698. That may be telegraphing that a 180 degree pullback is on the table…at least, in the bullish scenario.

180 degrees down from Wednesday’s high is 4640.

Given the angle of attack to the downside, there is a strong likelihood that this morning’s rally (as I write a few hours before the open) is a B wave affair with an ensuing C wave decline to at least the 4640 region.

Backstopping this idea is that the low day, October 27 squares 466 (SPY).

As well, as offered, the SPX has not tested its 20 day moving average since the market lifted off late October’s launching pad.

The 20 day currently resides at 4621.

Conclusion. The Santa Rally faltered on cue Wednesday.

Just as the SPX was on pace to hit a record high, the bottom fell out.

Chasing stocks turned to risk off on a dime.

Within minutes, the index dropped half a percentage point.

Within an hour, it was down more than 1%.

It ended the day down nearly 1.5%.

The VIX volatility index spiked more than 7 before easing a little.

Performance considerations turbo charged the rally in December, but extreme complacency going into Friday’s option expiration prolly perpetuated OpEx Pinball…where the SPY flips the switch from one strike to another….often violently as was the case Wednesday.

The most bearish thing about Wednesday is that there was really nothing in the way of news or narrative…no clear spark for the drop.

Except that is for a Time/Price square-out.

475 squares Dec 18.

You can’t make this stuff up.

If there was ever a good example of how the market is ordered and driven by geometry versus news, Wednesday was it.

Markets have turned on a dime several times in 2023:

The March low

The July high

The October low

It will be interesting to see if yesterday’s Key Reversal produces a Handle of a 2 year cup for a final surge in Q1.

Breakage below 4620 region opens the door to the 4400 region.