By: Jeff Cooper

Hit and Run Trading Morning Report - January 17, 2024

Monster Divergence

On January 16 with the DJIA down 231, SPX down 18, NDX down 2 and IWM down 2.40 points the first day after the SPX reached the highest level since the October 13, 2022 low for the decline, we have a significant divergence.

In a word, internals were abysmal: NYMO (NYSE McClellan Oscillator) closed on Tuesday at -52 and NAMO (NAZ McClellan) at -53, the lowest levels since the 400 point SPX decline last summer.

NAMO reached its lowest level since the 2000 point NAZ decline going back to last August.

It must be said that this divergence is occurring as the SPX is testing all-time highs while the NAZ is 1000 points below its all-time high on November 22, 2021.

Ask yourself, is the economy better or worse than at the end of 2021?

Is the geopolitical situation better or worse than at the end of 2021.

The divergence implies the SPX is making a double top.

That does not mean it will not go higher this year. It means that a consequential pullback is on the table if this is indeed a double top on the SPX.

Two essential aspects to yesterday’s decline are these:

1)      As NYMO and NAMO registered their lowest readings since last summer’s 3 month decline today is just the FIRST day off the intraday SPX peak of the recent rally.  The implication is the current decline is just beginning.

2)      The only thing that kept SPX and NAZ from a real rout yesterday was Davos AI hype.

It took NVDA higher by 18 points, AMD by 13 points, RMBS by 6 points before it backed off.

The other bullish influence in the market yesterday were the 4 Amigo’s: CRWD, ZS, PANW and CYBR.

Does someone know something about a cyber attack?

While we don’t deal in “news” per se, adhering to the idea that the news breaks with the cycles not the other way around, technical (cycles) dovetailed with comments from Fed Gov. Waller on rate cuts. Waller “confirmed” rate cuts are ahead, but did not provide any clarity about the timing while bulls have baked into the cake a first cut in March.

Rate cut uncertainty hit bonds with TLT dropping 1.78…the largest daily loss since topping at 100.57 on 12/28.

Notice the false breakout following a high level consolidation/line formation into Dec 26.

Notice the failure to follow thru to the topside after the reversal off the 20 day ma when the 3 Day Chart turned down on January 3rd.

This is how the market talks. It may not always be crystal clear, the message may not always manifest immediately, but the message of the market is indelible.

93 is a key region on TLT for several reasons.

1)      93 is 90 degrees up from the 82.50 swing low on October 23rd. That was a Time/Price square-out because 93 vibrates off October 23rd. It was a “Rembrandt” producing an 18 point rally in NINE weeks.

2)      A perfected square-out on this decline sets up theoretically on a drop into the 93’s at the end of this week as January 19th is opposite 93 and square Oct 23.

3)      Phil D Gap resides at 93 (the open gap from December 5th.

4)      The 50 day ma is at 94.

The complexion of bonds should TLT see the 93 region in coming hours/days will be important to gauge as to the action in the popular indices.

Yesterday we tweeted that the SPX is trying to hold its 20 day ma at 4750 but that breakage below opens the door to the 4695 region.

Today is 180 degrees straight across and opposite 468/469.

Consequently, if downside momentum shows up it would not be surprising to see the SPX magnetized to below 4700. That’s a 65 point drop from Tuesday’s close; however, it only amounts to a test of the January 5 prior swing low at 4682.

In sum the Fed continues to talk out of both sides of its mouth: lower rates are on deck while they continue to tighten the money supply by shrinking its balance sheet another $53 billion over the past four weeks following through on its Quantitative Tightening program.

The financial media is obsessed with the hope that the Fed will cut interest rates aggressively in 2024 fueling Q P---Quantitative Prosperity.

History tells us the Fed does not cut rates until a stock market plunge and economic recession is underway---whether they have to foment a plunge in order to finance US debt at lower rates.

As long as the stock market remains high and reported inflation remains twice the Fed’s target rate and reported economic growth remains strong, is there a reason for the Fed to cut interest rates?

If they do cut interest rates soon, they will be signaling that the real data underneath the reported numbers shows unacceptably creeping contraction.