Jeff Cooper: The Nasdaq Got Punched in the Face. So What’s the Plan Now?

“Everyone's got a plan until they get punched in the face.” 
-Mike Tyson

Stocks gapped higher on Monday's open on what felt like the 40th rally on the tax deal.

The gap was accompanied by strong breadth which waned quickly.

The NAZ never confirmed the new highs in the DJIA and SPX, and the chorus of bullish pundits in the mainstream media were content to call this benign rotation.

It looked anything but a normal and orderly ‘sell the over-owned/buy the under-owned' program to me.

FL up over 5% and NVDA down 8% exemplifies the extreme polarization on Monday's tape.

Rather, from my perch, it smelled like a setup.

Several years ago, a friend and fellow trader who once worked at a large mutual fund told me of a strategy they had whereby going into the last few weeks of a quarter, they would promiscuously take offers in their biggest holdings — often breaking them out — and then begin to gingerly trim these positions only to ultimately hit the bids on these names indiscriminately.

The strategy was two-fold: to sell into strength after forcing competition to chase, and then to undermine their competition's performance on a relative basis as they were caught like deer in the headlights.

As I often quote my dad, “Stocks don't move, they are moved.”

If there is an agenda, a setup like above, then a mini-panic, air pocket could play out into what felt like a universality of sentiment that stocks HAVE to float higher into year-end.

“A melt lower into the teeth of maniacal year-end buying goes against all animal spirit logic. It is, however,  well-within the probability spectrum for precisely that reason.” 
-Todd Harrison

Yesterday's carnage in tech was the 3rd such tremor in a week and a conspicuous change in character.

I can't remember ever seeing such disparity between tech and industrials and financials and transports.

The Transports versus the SOX in the last week underscores what is trying to be sold as ‘rotation'.

I don't buy it.

It looks like a manipulated panty raid by a big fund(s) make competitors' performance pale prior to year end.

‘Normal' selling doesn't indiscriminately hit the bid  in an air pocket — unless there is a method to their madness.

When this tactic is employed going into year end without the benefit of the market having inhaled by more than 3% in a year, the danger is that players won't Buy The Dip.

With beaucoup unrealized gains in the winners, market participants' mindset is likely more preoccupied with riding Santa's sleigh complacently into year-end so they can push tax ramifications into 2018.

That worked in 2007 for the most part, but the Rule of Alternation on the Decennial Cycle may find Mr. Market in a mood not to accommodate here.

Above, I mentioned what looks like the mother of all Jaws patterns between the north of the Transports and the south of the SOX.

Last week, we showed a daily SOX indicating a flush to 1250 was on the table. It hit 1252 that day followed by a short-lived bounce, closing at 1227 on Monday.

Let's examine a weekly and monthly SOX since this is the heart and soul of techville, and in my experience, it pays to dance with the one who brung ya.

The SOX snapped a weekly rising trendline in the last few days and is in the Plus One/Minus Two buy position for the first time since the ramp up started in August.

However, the angle of attack to the downside implies its 3 Week Chart (at the very least) will turn down and that the SOX will be magnetized to a test of its 20 week moving average around 1186.

The SOX hasn't tested its 20 week line since August.

It hasn't tested its 50 week moving average in 2017.

If accelerated momentum shows up following a turndown of the 3 Week Chart, the presumption is a test of 1150, the June high is on the table.

1150 ties to a 3 point weekly trendline from the spring and the June high.

So there is a confluence of technicals at 1150 that could exert downside influence on the SOX.

Notice that the week of July 3 is the only turn down of the 3 Week Chart in all of 2017.

Early January is 180 degrees/days from early June so that looks like a turning point.

A scenario sets up for a potential test of 1150 into January.

Alternatively if a magic rabbit appears and the SOX stabilizes in the hole, and a rally phase plays out into early January, the SOX sets up as a short at that juncture.

Let's look at a monthly SOX from January 2015:

In June 2015, the SOX left multiple sell signals, Monthly Train Tracks, and a Key Reversal month.

Ultimately this signal perpetuated a decline and a double bottom into February 2016.

From there, a persistent advance played out until June 2017 on the two-year cycle, where the SOX left a monthly signal reversal bar.

However, there was never really any downside follow through — the SOX turned its Monthly Swing Chart down which defined low and took off again.

In November, the SOX left another monthly signal reversal bar.

This time the second mouse (second monthly sell signal) may get the cheese for the bears.

The SOX is perched on a monthly trendline from February 2016.

While the dailies may look like ‘buying the dip' is in order, pulling back the lens shows the semi index is in a potentially precarious position.

1150 may loom as support and a break to that level will break a near two-year structure.

If 1150 is satisfied, it may perpetuate a reflex bounce to backtest the trendline above 1200.

50% of the SOX range from the February 2016 low at 552 to November's high ties to 947.

I think there is a strong likelihood this level will be hit in 2018.

Likewise I believe, as explained in this space last week, that the DJIA will see 18K in 2018.

Last week, we showed some long-term charts of the DJIA in our piece, Slaughterhouse Five.

Drilling down to a daily DJIA shows that yesterday's gap open overthrew the upper rail of a daily channel.

Overthrows are typical of big picture tops and buying climaxes.

Notably, while the DJIA closed green, it left a Gilligan sell signal.

This is a strategy I created to define exhaustion.

A Gilligan sell occurs on a gap up to a new 60 day high with a close at/near session lows.

Note that the DJIA closed below the upper rail following the Pinocchio above the resistance.

Yesterday's DJIA high was 24,534.

Moving the decimal to give 245 to work with my Square of 9 Wheel finds that 245 is 180 degrees straight across and opposite mid-January.

Click to enlarge

All year, we've been pointing to the probability that Gann's 45-year cycle from the topping process from December 1972 to January 1973 may be on the table.

Yesterday's report walked through that cycle's cause and effect and Gann's Law of Vibration.

There is another cycle from 1987 that seems to be in the market's DNA this year.

We've flagged the 360 month natural cycle from 1987 several times.

August saw a little volatility and it looked like a correction could play out.

Instead, a mirror image foldback occurred.

From late August the DJIA ran up to early December… a complete inversion of what happened from the late August top in 1987 to the closing low on December 3-4 that year.

Is it possible the market walks down the other side of this analogue now with a hard foldback decline echoing the selloff from August through December 1987?

Conclusion. 

Caution is warranted as our December 3-4 cycle from the bear market low in 1974 also suggests the possibility of a mirror-image foldback decline. In other words, what was a low in 1974 may be a bull market high in December 2017 – January 2018.

Likewise, no one knows what will happen on the other side of the Passive Euphoria… when selling hits the ETF's as we have never been here before.

“Every cycle..a bull market sets up most investors for eventual losses..and ultimately..poor performance. Because every time investors think it's different this time. And it never is.” 
-Mark Minervini

The biggest bubble potential in assets comes where our imagination is not tethered by understanding the cycle.