By: Jeff Cooper
Hit and Run Morning Stock Report: February 27, 2023
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High Wire Act
The SPX left an outside up day from its 50 day moving average on Thursday.
The reversal coincided with what looked like a successful test of the key 3980 Maginot Line and a successful backtest of the January breakout of the Line Of Most Resistance, the declining trend line from the January 2022 high.
I put too much stock in the signal… in part based on the belief that the market could rally into the March of Ides.
As noted last week, mid-March is 23 years from the March 2000 Bubble Top high and 23 squares March 21, Gann’s Zero Point and the natural beginning of the year.
This looks like a big deal.
We have been anticipating a sharp drop to the 4013 square (360 degrees up from the December low) to the 3980 Backtest region and the 50 day ma, so when the SPX reversed on Thursday it looked like it was respecting the setup.
Consequently, we took home some swing positions on Thursday night.
However, Friday’s PCR snatched defeat from the jaws of victory.
Anticipating upside follow-through worked nicely for us in ROKU and PANW recently, but it backfired on us on Friday.
Stocks have fallen sharply since many technicians banged the table on the BAM “indication” (Breakaway Momentum) from January.
The pullbacks are looking much more like rollovers than bullish pullbacks at the moment.
In other words, the spike highs look more like Buying Climaxes in the context of a bear market rally.
If the BAM Believers throw in the towel, market participants could go from denial into panic with the SPX losing its 200 day moving average at 3940, opening a quick drop to 3800
My number one rule of thumb: look to buy strong stocks when they crouch; look to sell weak stocks when they stand on their tiptoes.
On February 15/ 16, in sync with our mid-February Turning Point in the SPX, many of the names Hit and Run trades such as ROKU, NET, ETSY and LSCC, to mention a few, hit the skids.
In sum, the SPX left an outside up day on Thursday, but Friday’s PCE report pulled the plug with a gap down Triggering a Keyser Soze sell signal… a Reversal of a Reversal. In other words, Thursday’s upside reversal was offset on Friday open.
Fast moves come from false moves.
That said, the bulls may get a multi-day rally.
During a downtrend, if the SPX ends each day with a fresh low and that low is confirmed by a new low in NYMO (McClellan Oscillator), we should anticipate continuing the same trend the following day.
However, on Friday the way SPX closed versus the NYMO closing reading indicated a conspicuous contrast in their relationship.
As SPX closed at a fresh low, NYMO was much higher that its previous close last Tuesday.
This is a positive divergence. It implies a strong likelihood of a rebound.
Where can that rebound take us if it arrives?
Well the SPX 3 Day Chart is down with authority. It has been pointing down since February 7 when the turndown perpetuated a rebound that turned out to be a knee-jerk bounce.
Importantly, the SPX plunged when it violated the level where the 3 Day Chart turned down.
That is 4088.39 level which the index knifed below for the SECOND time on February 17th (PURPLE).
4088 ties closely to the 4077 square up from the December low.
That is currently beaucoup resistance.
The moral of the story is Mr. Market has a lot of tricks up his sleeve and likes to deal from the bottom of the deck.
The SECOND MOUSE GOT THE CHEESE on February 17, but even then the index “tailed up” leaving a Lizard buy signal. Look at what happened: like Friday, the next session (2/21)saw a Gap & Crap.
Both the February 17 buy setup and the February 23 buy setup not only failed to generate any upside follow thru but to the contrary, eviscerated stocks.
Rule 2: Setups are only setups; follow-through is key.
These two failed buy setups put us on high alert that the elusive 3rd of a 3rd wave down may be in progress.
If somehow the SPX is able to retrace to the aforesaid 4070-4080 region, it should present a nice shorting opportunity.
Currently, that ties to a 20 day moving average that’s rolling over as well as my Pocket Pivot Indicator on the dailies.
Wherever the SPX is if it’s able to backtest its declining 20 day ma it will be a good Holy Grail short setup -- if it gets there.
In the meantime, mid-March sets up as a critical turning point.
The presumption before Friday was that the market could hold up, even rally into that time frame.
That thesis was diluted somewhat on Friday but not entirely destroyed.
Why? Because the SPX Weekly Swing Chart underpins rally potential.
A weekly SPX shows a weekly Plus One/Minus Two buy setup and a weekly Holy Grail buy setup
Another possible reason for a rally that may last more than 1 to 2 days is that Friday’s close squares out with February 24.
The time frame around the Ides of March is a big deal.
The market is deteriorating and mid-March would seem to setup as a low.
However, if we pull back the lens to look at the weeklies we see the SPX is in the WEEKLY Plus One/Minus Two buy position at its 20 week moving average. So a weekly Holy Grail.
We have dueling banjo time frames between the dailies and weeklies at the moment.
At the same time, the monthly SPX shows it being rejected from its overhead 20 month moving average mirroring the August peak.
Conclusion. Here are the three factors I’m considering this week:
1) The only remaining support level for this week is the SPX 200 day moving average at 3920. The index almost breached this level on Friday dropping to 3943 intraday.. Should the SPX drop with authority below 3940, it would go a long way to validate the idea that we are in a potentially dramatic 3rd of a 3rd wave down. Below the 200 day ma, bulls could go on a buying strike until a flush-out plays out resulting in a potential rapid mini-waterfall decline.
2) The current decline the last two weeks follows several weeks of bearish divergences between the breadth measured by 10 day average Advance/Decline Line Indicators and major price indices such as the SPX, NDX and RUT.
3) During the past week, the NYSE and NAZ experienced a significant surge in new yearly lows - something that often precedes substantial market slides.
Bottom line. The SPX 3 Week Chart turned down in mid-December and turned back up the week of January 16. It continued higher which is usually a bullish indication.
The 3 Week Chart could turn back down this week on trade below last week's low which ties to the 200 day moving average.
If the 3 Week Chart turns down and the market does not get traction, it triggers a Time Turn Trend sell signal -- which as offered above, takes on added significance of a potential failure of the 200 day ma failing.