By: Jeff Cooper
Hit and Run Trading Morning Report - December 29, 2023
How To Make A Forecast
“So you can wipe off that grin, I know where you’ve been.”
-Phil Collins, In the Air Tonight
Most market letters won’t make a specific forecast.
They keep things very general.
One of the reasons for this (other than there is no mileage in it) is that most letters deal with price only. Time is a tough customer. But you need both pieces to make a forecast that holds any water.
Based on a “natural” cycle I’ve been working with recently, I expect a 4 ½% correction to start within days.
This cycle exerted its downside influence at the end of 2004.
On December 31, 2004, the SPX struck a high for the move and reversed leaving a minor outside down day.
An approximately 4 ½ % correction into late January followed.
This is just one example of the cycle I’m working with.
Notice that the low prior to the December 31st high was on October 25th, 2004…mirroring the recent October 27th, 2023 low.
Now check out 2023 and the October low and the ramp into the last trading day of the year.
Uncannily, in both instances the cycle perpetuated vertical rallies.
What is interesting is that late January 2024 fits perfectly into a 90 degree cycle that has been playing out since April 2023 (at least).
On April 27, 2023 the SPX struck a low and rallied into an important high on July 27th---90 days/degrees later.
An important low occurred precisely 90 days/degrees later on October 27th.
January 27th is another 90 days/degrees forward and ties in perfectly with the aforesaid “natural”
Cycle which points down into late January.
In sum, there is a low to high to low to low cycle on the table.
The more synchronicities, time/price harmonics…call them “vibrations” the stronger the likelihood that of a turning point.
In this instance we have two:
1) The natural cycle from end of October 2004 to the end of December 2004 that produced a 4 1/2 % correction.
2) The current 90 degree cycle.
In addition, a 4 ½ % downdraft from Thursday’s high is 216 SPX points
A 216 point decline from this region is 4577 which is a pullback that probes the July 2023 high of 4607.
The closing high in late July was 4588. Wow.
Basically a direct hit.
Prior resistance typically acts as new support.
So it is not just interesting that this natural cycle ties to a test of the July peak…it’s a Rembrandt.
Given the runaway move off the late Oct low where we got no more than two consecutive days against the uptrend, arguably most market participants think a drop to the 4700 region in a matter of weeks is the short straw. Recency bias.
But that is exactly why it may happen---reversion to the mean implies an abrupt sell-off to shake out the complacency.
That said 5% corrections happen frequently. On average, a 5% decline in the market has occurred 4.5 times a year since 1980.
What about sentiment?
The AAII (American Association of Individual Investors) survey is hovering at 50%.
History shows that when bullish or bearish sentiment reaches a majority, a top or bottom is very close.
In recent years this sentiment setup has been very good.
Conclusion. We know that 349 (the Oct 2022 SPY low) points to early January as well.
All the pieces are in place underpinned by a pattern of 3 Drives To A High on the hourlies.