Jeff Cooper Asks: Is This Time Different?
“The path is smooth that leadeth on to danger.” William Shakespeare
There’s always some news for pundits to point to explain market action day today.
There’s always some news ….and someone usually knows.
Take a look at the chart below of the sell spike prior to news on the tax bill yesterday.
Front-running for a short-term play on news usually (not always) means that the market will seek equilibrium when the position is closed out.
Yesterday the market gapped down and kept on going with the SPX undercutting its 20 day moving average for only the second time since exploding through our well respected 2480-2490 level—a level that held the index in check for 7 weeks, an important number for you Gann students.
On October 25 the SPX also undercut its 20 dma following a Key Reversal Day on October 23.
The dip was bought with the index gliding to another new all-time high.
Likewise, yesterday’s drop below the 20-day line followed a little signal reversal bar on Tuesday.
In both instances, the SPX recaptured its 20-day moving average in style—especially yesterday, with the index rebounding to close near where it opened.
That said, the SPX was still off 9 points on the day.
Be that as it may, one day does not a trend change make, nor does one stick save a reversal make.
In this case, the reversal of the trend I’m referring to is the conspicuous deterioration of the internals.
Despite record new high after record new high in the last 2 months, the 50 day moving average of the A/D Line has been flat.
During that same period the RUT topped out a month ago and undercut its 50 day moving average yesterday.
Earlier this week we showed two charts of the RUT demonstrating that despite the crawl lower, the important 3 Day Chart had not turned down.
The RUT 3 Day Chart finally turned down yesterday in tandem with a test of its 50 day line.
The normal expectation…in a bull market…is that the first test of the 50 day right off record highs would perpetuate a rebound of some sort.
Likewise, the presumption would be that the first turndown of the 3 Day Chart following the record run since mid-August would also elicit a bounce of some sort.
So we got a snapback of some sort yesterday.
The real question if the trend is turning down…either for a buyable correction if you’re a bull or the start of something more pernicious if you’re a bear…take your pick, will be the nature of this rebound, both in time and price.
If it is going to be feeble and short-lived as in hours or days…or at not at all, the market is talking.
Given the size of yesterday’s Bottoming Tail in the SPX, it would be a feat to see yesterday’s lows violated and Thursday’s tail snapped. Yet, if the intermediate trend has turned, this eventuality is not off the table. A decline below yesterday’s lows on the important Friday weekly closing basis would be a sign of the bear.
If this occurs and we get follow through next week, Gann geometry implies a quick drop to 2500.
Near the 30 year generational and 360 month cyclical anniversary of the 1987 air pocket, the SPX left a sell signal .
I can’t help but wonder if the first mouse (the first little sell signal on October 23rd and the ensuing break of the 20 dma) got the squeeze (as players jumped on the short bandwagon) whether the second mouse (Tuesday’s signal bar reversal and the second ensuing break of the 20 dma) will get the cheese— for the bears.
On the Square of 9, November 9/10 is straight across and opposite the number 37.
.jpg)
37 years from 1929 was 1966 and a secular bull market peak like 1929.
Likewise, 37 years from the 1980 low is 2017.
While the generational bull market began in earnest in 1982, it is worth noting that the price low occurred two years earlier in 1980 with a rally and then a test in 1982.
So, a 37-year cycle high to high and a low to high cycle may be on the table—1929 to 1966 and 1980 to 2017.
It is interesting that 37 years from 1966 ties to the start of the bull run in 2003.
Notice that on the above Square of 9, Nov 9/10 is on the same axis as 80 as well as 37.
Of course 80 years ago was 1937.
This was the year when the Fed thought the coast was clear to raise rates and the vast majority of market participants were convinced that the Great Depression was long over.
Sound familiar?
1937 marked the next leg down in the economy and the market.
Conclusion.
The market broke hard yesterday and there are always a number of scintillating rationalizations by people who play games.
However, for those who adhere to the notion that the news breaks with the cycles and not the other way around and that mood moves the market, versus the market molding the mood, there is not much room here for disappointment or further Fed manipulations.
The dollar broke yesterday and with most all DJIA stocks down on Thursday this may point to overseas liquidation by those who were hoping to sell into the ‘good news’ of tax reform.
They may look to sell early now rather than wait.
Likewise, money managers who by hook or crook would like to try to keep the indices buoyed up into yearend for bonuses ala 2007 may have itchy trigger finders here with air-pocketism hitting the tape in names like PCLN, BID, MNK, RRGB, and TTD last night…to mention a few.
Of course, on the other side, there is air-pocketism to the top side in names like ROKU, OSTK, and TTWO.
Underneath the smooth surface of passive ETF buying and massive speculative VIX short bets, individual names are spiking up and down and often both directions from one day and one hour to the next.
NVDA is the latest bungee on a leather cord: down 5 after earnings last night and up 7 pre-market.
Strategy.
It’s been a smooth path this year with complacency rising from each short-lived dip, but time may have run out on the bulls game of shorting volatility if we stay down today in front of the weekend and especially if we break Thursday’s lows. If so I would be cautious about carrying over too many longs here a Gann 7 weeks prior to the end of the year.
Above we mentioned the 37 year cycle and 1966. The 200 week moving average of the % of bears is at its lowest point in the last 50 years, only lower in 1966.
Because the market hasn’t inhaled this year, psychology could feed on itself if a decline develops with beaucoup unrealized gains on the table in front of year-end.
As Jason Goepfert states, “a daily 2% move in the SPX would be a 4 standard deviation move”
Essentially a 2% intraday move would seem like a crash and could perpetuate panic selling and redemptions.
Disclosure: Position in TZA