Is this 1987 or 1929 all over again? Or a garden variety panic?
On September 27 we wrote an article titled The Hunt For Red October where I walked through the reasons why I thought “a big short may be setting up for October all the way down into the election.”
Stocks often waterfall when they snap a Rising Wedge.
The SPX dropped below the bottom of its Rising Wedge just above 2900 on a gap on October 4.
Following Tuesday’s little headfake ‘hook’ rally the index broke wide open on Wednesday.
Of course people being people often want to make things more complicated than they need to be.
The break of a simple trendline can often be illuminating…
1) If there is follow through
2) If the cycles suggest they are going to exert their influence, and
3) If the structure of the market points to completion.
Follow-through is key. It is not the break of a trendline in and of itself but the subsequent behavior that tells the tale of the tape.
The behavior following the break of a trendline of a structure such as a Rising Wedge is what I mean by ‘observation’.
The behavior following last Thursday’s break of the Rising Wedge was bearish. The SPX tagged its 50 day m.a. but could not generate any upside traction during which time we continued to lose leadership — something we’ve been pointing to for weeks.
Here's a message we just received from Bob from Maine: “Jeff's analysis of all the current cycles coming to a head right now in Oct has been right on the money and helped me to hedge with UVXY.”
One of the things that underpinned my thinking that the market would hit an air pocket were the many Late Stage False Breakouts in names like NVDA, AAPL, and XLNX, to mention a few.
Then of course, there is the Late Stage False Breakout on the weekly DJIA which was defined by the Topping Tail on October 3rd.
Last week's outside down week below the January record high was a blaring siren that a secondary high (to the January high) may be on the table. This week's follow-through underscores that notion.
The above chart shows the DJIA is on a strong angle of attack to its 50 week moving average.
Notice that the 50 week m.a. acted as support three times since April.
You don’t find many quadrruple bottoms in the market. This is why I created the Rule of 4 Sell signal that works on all time frames.
A break of triple bottoms usually sees acceleration.
The 50 week moving average on the DJIA ties closely to a 3 point trendline connecting the lows for the year.
The take away is that if this trendline breaks, an Eiffel Tower move, a complete retracement of the rally off the spring low will play out to around 24,000.
A weekly SPX shows pretty much the same picture.
The 50 week m.a. ties to 2743 while the 3 point trendline of the year’s lows is around 2680.
Importantly, as offered this week, a 360 degree decline from the SPX 2941 high projects to 2728.
The 200 day (basically the same as the 50 week m.a.is 2765,
Wednesday’s plunge suggests the SPX will be magnetized to this cluster this morning— somewhere between 2728 and 2765.
However, Wednesday was a Dirty Harry Close.
Just as the SPX had collapsed yesterday on a gap below its 50 day m.a., so too, it could come unglued today on a gap below the 200 day moving average.
Feelin’ lucky?
Note that a trendline from the February 2016 low will be violated on follow-through today suggesting continuation below the 50 week m.a.
Notice that the 50 week m.a has not been violated once since the February 2016 low other than a Pinocchio during Brexit in June 2016.
Consequently, the presumption is a break of this 31 month trendline in league with a break below the 50 week m.a. could see the SPX magnetized to a 50% retrace of the leg up from Feb 2016. This is 2375.
Above, we mentioned the risk entailed based on the structure of the market.
It is possible to count the 2941 high as a completed 5th wave high from the 2009 low.
Whatever the count, there is a clear 5 wave count up from the presumed wave 4 low in Feb 206.
Drilling down to the dailies shows Wednesday’s undeniable failure below the January top.
The takeaway is that January was a blow out top with September’s margin new high a secondary top in the spirit of the July/October pattern top in 2007.
The difference is that the process was 3 months long in 2007 whereas in 2018 the process is 6 months long.
The bigger the top, the bigger the potential drop.
As we’ve indicated for months, the prospect was that the 1st quarter high and 3rd quarter test high was more in keeping with the pattern from the year 2000.
Above we mentioned the value of a simple trendline in determining the line of least resistance.
A daily SPX below shows how Wednesday’s crash followed the break of a trendline from June.The SPX has tested its 200 day m.a. three times already this year.
The implication is a 4th such test will not hold. While it is entirely possible a test/undercut of the 200 day m.a. today will elicit a rally attempt, I think it will be a sucker’s rally if it plays out.
Remember, the 4th time through is usually the real deal.
While many shorts will probably cover at/near the 200 day m.a., there is a difference between shorts covering and new money being deployed.
IF a rally attempt plays out and the SPX falters below back below an initial low, it should be extremely vulnerable:
Any longs that bought will puke up their stock in the context of a weaker tape that has used the buying power of shorts covering.
To recap, a flush of the 200 day should see the SPX test a trendline for the year which ties to 2728 which is 360 degrees down from high.
If 2728 fails, the next level to watch is 2624.
Interestingly, 2 complete revolutions of 360 degrees down from high is 2523 or basically a complete retrace to the lows of the year.
Is this possible?
In Monday’s report, If It’s Ever Going To Fall, It’s Now, we showed a chart of the 1987 crash:
The crash of 1987 got underway on Friday October 16 with a Gap & Go below the 200 day m.a.
Today we may get a Gap & Go below the 200 day.
Notice that in 1987, the October 16 large range decline was right on the heels of a a break below the 50 day line.
In that respect, if the analogue is in play, today’s break of the 50 day is more alarming than in 1987.
The important thing to watch will be the behavior at the 200 day.
A close below the 200 day going into the weekend warrants extreme caution.
Now, crashes are rare birds to be sure, but the T Rex in the ointment is that time/price harmonics have been warning of the possibility of a genuine crash.
Recently we showed these harmonics on a Square of 9 Chart.
The observation is the alignment between the 58 year period from 1929 to 1987 and the 31 year period from 1987 to 2018.
This alignment squares-out with the end of October (90 degrees square) when the crashes in 1929 and 1987 occurred.
We don’t know what the rest of October 2018 will look like; however, it is worth noting that the Gann Panic Window from the high of the leading index, the NAZ opened on October 10th, yesterday.
The Gann Panic Window is 49-56 days from a high.
This is when the crashes in 1929 and 1987 occurred.
So, no matter how bullish you may be, patience may pay large dividends for the next 10 days or so.
Positions: SPXS, UVXY
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