Is a Bullish One-Two Punch on the Way?
As we offered earlier this month, sooner or later the Fed would blink and gold would wink. Sooner or later the Fed was going to come to the rescue of the bulls. After all it is the banks that are their constituency.
The Fed saying it was concerned about the economy slowing was good enough for 600 points in the DJIA and 60 points in the SPX — the best day in 8 months. The Fed blinked and the gold miners appeared to have winked. Follow-through will be key in the miners to see if they chalk up strong weekly closes.
The big question is was this a set up following the big gap down flush-out on November 20th that tested the late October low? The closing low at the October 29 low was 2941. The closing low on November 20 was 2941.
Because this potential W Bottom was playing out on the 10th anniversary of the crash low on November 21, the presumption was an important low may be on the table. While the SPX itself did not reverse to the topside with authority on November 20, many go-to names did.
Former leaders like SQ, W, TTD and PAYC left Gilligan buy signals on November 20. A Gilligan is a gap down to a new 60 day low with a close at/near session highs. Other glamours with relative strength and higher lows on November 20 such as TWLO, MDB and SHOP left signal reversal bars.
It is a market of stocks not a stock market; consequently, it was the action in these leading names in tandem with the Gann Decennial Cycle from 2008 (amongst other cycles noted in this space such as the one year cycle from the start of the blow-out move in late November 2017 and the consistent 2 year October-November troughs since 2012) that persuaded me to switch gears and look to the long side for setups.
So while the SPX looked like it was failing last Friday with a close below the October 29 low, we stated that the gap up open on Monday pulled the rip cord on our Flying Elvis long pattern.
To recap this is where it appears a reversal is playing out only to see the market falter the next session. However, on day 3, the market (or stock) GAPS up and closes at/near session highs.
The hook is in. The market creeps higher with bears not recognizing the stealth change in complexion and continuing to lay out shorts into resistance — in this case all the way up to 2685ish.
This is a level we defined as critical where there was an open gap from…you guessed it, November 20th. As we noted if that gap got offset/filled it would be the gateway for a challenge of 2709 which is the mid-point of the last leg down.
This morning’s report stated that “the shorts have piled on and there is risk of a melt-up…” When the SPX cleared 2710 with authority, it exploded to 2744.
In so doing, the SPX closed above the mid-point of the year which is 2737. That is theoretically bullish, but remember the SPX did the same thing in early November. That perpetuated a one day wonder to 2815 just below the 50 day moving average that proved to be a Trap Door for the bulls.
Additionally, the Weekly Swing Chart turned up on the week of November 5th for the first time since turning down on the first week of October. That turn up defined a high.
This is what I mean by using TIME to define trend versus price. When the Line Of Least Resistance as Jesse Livermore called it is down, when the weeklies turn up it typically defines a high soon in terms of time and price…and vice versa.
Yesterday the Weekly Swing Chart turned up once again. This is going to be an important test for the market.Will the turn up in the weeklies once again define a high in coming hours/days? Or, will the “second mouse get the cheese” for the bulls.
In other words will this second turn up in the weeklies represent a change in character. The early November turn up in the weeklies reversed from just below its 50 day moving average.
Now that well-watched moving average is overhead at 2781. At the same time the mid-point for ‘Red October’ is 2771. Moreover, on Wednesday the SPX closed right on a declining 3 point trendline connecting the October 3rd top and the November 7th top.
If the SPX can clear this declining trendline, it will trigger a Rule of 4 Buy signal. This is a break above triple tops.
However keep in mind that a bear market is treacherous for head fakes—a move above this trendline even if it entails a push to 2771-2781 followed by a stab back below the trendline (2744ish) will be a bearish event.
Of course if the SPX successfully clears this trendline and then 2771-2781 it implies higher prices. That said, it is worth considering that the entire leg down from the September high to the October low may be an A Wave and that the index is tracing out a large B Wave.
The implication here is that ultimately a C Wave will see a decline 2150-2260. The most bearish case is that Wednesday was another one day wonder that will see a give up that will be larger than that following the November 7th pivot high.
How will we know?
A pullback that does not hold 2709 and then fails below 2685 demands a defensive posture. The bottom line is it looks like a binary set up: either the SPX is set to march to as high as 2900ish or a leg down to 2500.
The next big catalyst after Powell’s impersonation of a dove on Wednesday will be this weekend’s G20 meeting with President Trump and President XI. This will be a binary event as well mirroring the technical position of the SPX.
As I often say, the news breaks with the cycles, not the other way around. Many expect a kumbaya moment where there is not war cake for desert but a banana split where both parties commit to work together producing a one-two punch for the bulls—first Powell and then Xi.
Relying on a trade resolution with China for upside in the market seems to be the short straw. But you never know, if there are pretty words, the market may hop on them for an excuse to rally if that’s what it wants to do.
However, if no kumbaya , then the market could skid worse than before. This is because the perception that a successful test of the October lows may have played out causing the vast majority of shorts to cover at the same time causing longs to deploy funds.
That means that a failure now back below 2709 will not have the buying power of shorts and will be pressured by players jettisoning new longs.
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