Jeff Cooper: Not All Breakouts Are Created Equal

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“A man forewarned is worth two.”
-French proverb

On September 12, the SPX set a new high above its August Key Reversal High.

Two weeks later it remains to be seen whether the breakout is the real deal or a Bull Trap.

The week before last, we noted the record historic 3 consecutive narrow range days.

The contraction in range followed the September 11 apparent relief spike when Hurricane Irma wasn't as catastrophic as feared.

We stated that contractions in volatility are followed by expansions in volatility.

The week before last, the SPX closed at 2500.23. On Friday it closed at 2502.22.

So far, after the breakout of our key 2482, the SPX is poker-faced, holding its cards close to its vest.

Not all breakouts are created equal.

Stocks and indices typically test a reversal, leaving a double top or double bottom.

Often, this test pattern takes the form of a slightly higher high or a slightly lower low.

The ‘breakout' test failure is often dramatic.

Let's take a look at two examples that appeared to have played out last week.

TSLA set a high on the week of June 26 at 387, followed by a sharp decline.

Last week it made a nominal new high at 389.61. and reversed immediately to 350.

In so doing, TSLA triggered a weekly Soup Nazi sell signal.

This is a new 20 week high that knifes back down through a high of at least 4 weeks ago, to guard against the idea of a continuation move.

Importantly 389.50 aligns exactly with June 26 for a time/price square-out.

The nominal new high vibrated off the June 26 high.

As Gann said, when time is up trend turns… not when price is up.

As you recall from a daily TSLA last week, 350ish ties to important trendline support.

This 350ish level also ties to support measuring from the November 2016 low in addition to the 20 week moving average.

TSLA has undercut its 20 week this summer briefly and recovered. However, another undercut of the 20 week will confirm the idea of a double top.

Drilling down to a 10 minute shows TSLA's Bowling for Strikes play on Friday from 375 to 350.

After kissing the 370 strike on Friday's open, an Opening Range Breakdown elicited a plunge toward 350.

False moves lead to fast moves. The false breakout on Friday morning within the context of the false breakout on the weeklies combined for an air pocket on Friday.

Now let's take a look at W.

W broke out last Wednesday, eclipsing the high from the prior week — which itself was a recovery rally from a pattern high in late July/early August, a Megaphone Top.

W probed the high from a week ago on Thursday, but that could have been a constructive consolidation following Wednesday's large range breakout.

However, Friday's knife down through the prior 20-day high delivered an unequivocal Soup Nazi +1 (plus one day) on the daily time frame.

The result is what looks like a double top on the dailies and weeklies as W faltered after testing the pattern top from August.

This is a good example of a Test of a Test pattern. We started off by saying that stocks and indices test highs and lows prior to a trend change.

Often, that involves 3 drives to a high (or a low) tracing out a Test of a Test.

In other words, the August high was tested in mid-September and that high was tested last week and the test failed.

Similar to TSLA, the false breakout setup a Bowling for Strikes play in W on Friday.

When W triggered an Opening Range Breakdown on Friday, a plunge from 80 to 75 played out.

ORB's do a good job of identifying fast Bowling for Strike plays after a false breakout leaves players wrong footed.

Whether these situations are happenstance or are orchestrated for some to benefit from the leverage of weekly option expirations, I'll leave you to decide.

Be that as it may, the recent air pockets in TSLA and W following nominal new highs on the heels of initial breaks is reminiscent of the pattern high in the SPX that occurred in July/October 2007.

A high was set in late July that year followed by a sharp break and a nominal new high in early October.

This year the SPX set a Key Reversal in early August followed by a relatively sharp break (2490 to 2417) and a nominal new high — so far.

This pattern is on the table as the Fed is set to begin its balance sheet unwinding in October.

September is seasonally the worst performing month of the year. Not so this year when there were plenty of excuses (Hurricanes, North Korea), for the market to react.

I can't help but wonder if this has set up a bubble in complacency going into October.

This October is a remarkable time for the Fed to begin Quantitative Tightening.

W.D. Gann called 7 the number of completion and perfection. He believed it was a number of panic.

We are in a year ending in 7, which has a good record for producing fall panics.

October is the 7th month from the natural beginning of the year, the spring equinox.

We are 7 weeks from the important early August reversal week.

180 months is an important period for Gann.

180 months ties to 15 years.

15 years ago was the bear market low in early October 2002.

15 years before that was a final pivot high in early October in 1987 followed by a crash.

More on these time/price synergies in tomorrow's report.

Conclusion. In their 104-year history, the Fed has done a remarkable job of perpetuating the very panics they were presumably created to prevent following the Panic of 1907.

The Panic of 1907 also started in October.

October is an interesting time to begin to reverse something that's never been tried before.

To choose October to begin to unwind trillions in what is now the second longest running market in history and the 3rd largest bull market since the 1930's, is remarkable. To do so when there has not been more than a 3% correction in well over a year and only one decline of 20% since the 2009 low is extraordinary, if one believes that the Fed contemplates and controls the prospect of self-fulfilling technical and cyclical proclivities.

Strategy. A failure back below 2490 and especially 2480 suggests a false breakout is on the table.

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