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How the Holy Grail Buy Setup Works

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This morning the SPX is set to test its rising 20 day moving average for the first time in almost 3 months.

A test of the rising 20 dma in a bull market is called a Holy Grail buy setup because it so often marks buying opportunities.

However, as an hourly SPX from this morning’s report shows, we may get a Holy Fail—a failure of the SPX to find support at its 20 day.

It looks like Tuesday’s Momentum Gap was a Wave 1 down with the subsequent sideways wide and loose chop being a Wave 2.

This morning’s gap down may be the onset of a powerful Wave 3 down.

This morning’s gap is knifing through the key 2818 level which is 90 degrees down from the 2872 all-time high.

The next square of 90 degrees down is 2766

Another Momentum Gap that sees continuation below the 20 day moving average this morning will probably find the bulls keeping their hooves in their pockets along with their wallets.

Those who have been around for more than a few cycles remember Red Friday October 16th, 1987 which led to Black Monday.

So the bulls may cool their heels today waiting to see what Monday brings.

Interestingly, there is a new Fed sheriff in town…just as their was prior to the ’87 crash.

Of course markets don’t crash right off their highs do they?

Well 1929 virtually crashed 7 weeks off its high and 1987 crashed 7 weeks off its high.

Of course the mindlessness of machines didn’t dominate then as they do today.

The market usually, not always, offers a graceful exit.

Additionally, there were specialists back in the day who could stabilize the market to some degree buying for their own account backstopped by the powers that be.

Now it seems the Sheriff operates on his own without the benefit of a posse.

The Fed Put has been market’s Salvador Mundi.

But the Street may have a come to Jesus moment in the not too distant future.

The SPX is set to leave weekly Train Tracks…straight up last week, straight down this week, a bearish signal.

A 50% retrace of January’s advance ties to 2777. If that level is breached, the likelihood is an Eiffel Tower is on the table—a complete retracement of the months advance.

If this plays out in February, the SPX will install monthly Train Tracks, a further bearish pattern.

A monthly reversal may be the Sign of the Bear — an acknowledgement that the financial markets have taken over the bond market and that the Trthat the is built on the quicksand of the bubble the previous administration and the Bernanke/Yellen Fed of artificially low interest rates.

Last July we showed a weekly TNX flagging a big picture Cup & Handle.

Six months later, TNX began to accelerate and we followed up suggesting that the breakout suggests 10 year yields may be targeting 3.90%.

When gentleman do not prefer bonds, stocks may get coyote ugly.

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