By: Jeff Cooper
Hit and Run Morning Stock Report: February 22, 2023
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Is This The Elusive 3rd Wave Down?
Stocks plunged. Turnaround Tuesday was AWOL.
The SPX fell 9 squared points (81 points) closing below the 4013 “square” up from the December low but holding the Maginot Line, the 3980 “backtest.”
This is the backtest level of the breakout of the declining bear trend line from the January 2022 top.
The early warning from early February of a turning point exerted its influence on Thursday and followed thru sharply on Tuesday.
The SPX 3 Day Chart turned down immediately off the February 2 high. The index rallied sharply immediately intraday on that turndown leaving a large range outside up day (LROD or Lightning Rod).
However, there was zero upside follow-through. Follow-through is key.
The SPX backed and filled keeping its cards close to its chest; however, it went into my daily Minus One/Plus Two sell position on February 14 -- opposite the August high, timewise.
We had circled that timeframe as critical.
To recap, a – 1/+2 sell setup exists when the 3 Day Chart is pointing down (minus 1) and then you get 2 consecutive higher daily highs (NOT CLOSES necessarily - just intraday satisfies the criteria) for the plus two.
Following a Paws Day (Pause Day), the SPX dropped to its 20 day moving average on February 16.
This was the second test of the rising 20 day, the second Holy Grail long setup, since the December low.
The test failed. The next session the index gapped below its 20 day.
Despite “tailing up” on Friday, the gap remained. It proved to be squeezage into the runoff on Friday, as Mr. Market came out loaded for bear yesterday with a second mouse Breakaway Gap down.
The first mouse gets the squeeze, the second mouse gets the cheese.
The first signal gets the squeeze (Friday), the second mouse (Tuesday) gets the cheese.
The bears got the cheese on Tuesday as stonks stunk up the joint.
The unequivocal break of the 20 day put the 50 day moving average squarely in Mr. Bear’s crosshairs.
This ties directly to the Maginot Line, 3980. The Big Backtest.
If it fails it validates the idea that a dramatic Wave 3 down is in progress following an A B C corrective wave up off the October low.
Decisive breakage of 3980 opens the door to the high of the low bar day (October 13) in the 3700 region.
Tuesday’s sharp decline comes after a few weeks of bearish divergences particularly the NYSI, the New York Summation Index that turned down from an extreme reading.
As we noted, in a Bull Market the extreme reading may have indicated BAM (Breakaway Momentum) but in a Bear Market, it was more likely to be a nail in the coffin.
The vast majority of bullish technicians pointing to BAM failed to look at the history of extreme NYSI readings PRIOR to the bull market since 2009.
In sum, the same signal in a bull, does not carry the same significance in a bear.
Tuesday’s NYSE breadth recorded a weakness of -2332, the lowest since September 2022.
Similarly, the NAZ breadth of -2914 marked the weakest since June 13, 2022 indicating the strong likelihood is the markets are entering the next leg down of the Primary Bear Market.
Given the short term oversold market, a bounce would be the normal expectation. However, remember that usually genuine reversals come from DOWN opens on the heels of strong sell days…not UP opens…
An up open would seem to invite a test/undercut of the 50 day moving average and 3980.
The weakest breadth of the year suggests a new leg down, Wave 3, is on the table.