Is December Melt-Up Time?
“Big circles and little circles, old circles and young circles, past circles and future circles, will all come together and square-out in time.”
-W.D. Gann
Equity markets dropped sharply in October in keeping with a consistent 2-year cycle that projected at least a 10-15% decline, fulfilling our expectations for a Red October. The structure indicates October’s decline was a shot over the bow of a larger degree peak in the making, just as January was a shot over the bow of October’s drop.
The presumption is a larger peak in the making for a decline to 2100-2300 SPX in 2019 in keeping with the 90 year cycle. Since the persistent advance from February 2016 , market swings have greatly accelerated in 2018. With the expansion in volatility, market timing is going to be critical to navigating the tape in 2019.
With that in mind it is helpful to review what the basic cycle expectation is for 2018 and 2019 in order to assess where things currently stand. These are cycle expectations and represent a framework; the week to week price trends and behavior hone those expectations.
If you don’t have an understanding of cycles and how time works in the markets and expect price to play nice and accommodate you, you are going to be subject to whiplash over the coming year—at least.
Market timing was given short-shrift over the last few years but I guarantee you, timing is going to be front and center in 2019 as it has been since late August. Going into January 2018, we were looking for a high and reversal in keeping with the 45-year cycle from the false breakout top in January 1973.
To recap, those expectations coincided with a time/price square-out or balancing out of time and price with the late January 2872 high being opposite late January on the Square of 9 Wheel.
After the SPX carved out a triple bottom at its 200 day m.a. in early May — roughly 90 days/degrees from the January top and the February low, which perpetuated a breakout on May 9th, our expectations were that an important 3rd quarter top was in the making mirroring the 18 year cycle from the year 2000 when a 1st quarter high was followed by sell-off and a test in the 3rd quarter.
We first showed that pattern in the spring comparing the Matterhorn Top pattern in 2000 to that of 2018 and followed up with it in our Nov 1st report, What To Look For If A Year End Rally Is On the Table.
A turning point set up with uncanny precision in early October as that was 180 degrees/days opposite the important early April low. It fulfilled our expectations for a Red October when an uncannily precise 340 points. Measured Move decline of the February decline played out.
Many technicians were looking for the hammer to drop on a break below 2600 in mid-November. We warned that November 20th looked like it was setting up a good test of the late October low. This was based on the Decennial Cycle from the crash low/primary low on November 21st, 2008.
Additionally, the 340 point declines on the SPX this year squared out with November 20 as shown on the Square of 9 below.
What happens this week will clarify whether some of the indices and some stocks are able to stretch the next high out into early 2019. This is 90 days/degrees from the major October 3rd high. 270 days/degrees from the April 2 low and 360 degrees from the start of the blow-out move on January 2nd, 2018.
The SPX cleared two price hurdles with authority on the weekly closing basis last week. These are 2737, the mid-point of the year and 2723, the mid-point of the last leg down.
In so doing it also closed above a declining trendline connecting the October 3rd high and November 7th high which suggests the potential for a push into critical resistance.
That resistance is 2772 to 2815 for several reasons:
1) The weekly pivot closing high in March was 2786
2) The weekly pivot closing high in early November was 2781
3) The mid-point of Red October’s decline is 2772
Based on the futures action on Sunday night as I write, the SPX will gap through all three levels on the open.
Friday’s action implied potential for an extension higher despite the already dramatic rally since November 20th. Higher prices were also implied based on the Follow Through Day on 11/28. However, today begins a new trading month. The Monthly Swing Chart turned down in March. It is poised to turn up in December on trade above 2815.15, the November high.
If the market is in a bear trend, a turn up in the Monthly Swing Chart should define a high. A rally to around 2815ish could also install the right shoulder of a Head & Shoulders top.
Interestingly the monthly high close in January, which could be a left shoulder, was 2823. So there’s some good symmetry here near 2815.
Remarkably, a full 360 degree revolution in price up from the October 29, 2603 low gives 2811. As I write this, the futes have traded to as high as 2809.75. You can’t make this stuff up.
The SPX Monthly Swing Chart could turn up here in tandem with satisfying a 360 degree advance from the 2603 swing low in league with the resistance level of lore from mid-October and early November setting up the possibility of triple tops. Only continuation/momentum following a turn up of the monthlies suggest meaningfully higher prices.
So the market is set to give us a lot of information over the next few hours/days. As mentioned last week in my report Bullish One-Two Punch, there was “risk for a melt-up.” I’d say 200 SPX points in a 6 days qualifies as a melt-up.
Theoretically, the SPX is working on an inverse Head & Shoulders with the aforementioned declining trendline representing the ‘Neckline’. This gives a possible projection to new all-time highs above the January high. Continued momentum when and if the Monthly Swing Chart turns up on trade above 2815 implies a move new highs as high as 3000.
However, the T-Rex in the ointment is that a Head & Shoulder reversal right shoulder could be playing out at this 2815-2820 level. Be that as it may, the SPX failed in its last two attempts to convert its 200 day moving average —on October 16th and November 7th.
The big one day rallies above the 200 day m.a. on those days proved to be one day wonders. Another can’t be ruled out on this weekend’s trade truce between the US and China. The question is whether this One-Two Punch, Powell and now G-20, is a sucker punch? Heads up for a sell the news rally.
Given that the futes were up as much as 50 points Sunday night on a TRUCE, it begs the question where would they be if Trump & XI sealed a genuine deal? Checking a monthly chart shows that the SPX closed January at 2823.
A turn up of the Monthly Swing Chart here on trade above 2815.15 could put in a big picture right shoulder. The behavior of the markets from this level is going to be critical to observe.
We could pullback initially and chop around holding up into late December based on window dressing and FOMO (Fear Of Missing Out). There are many funds that trimmed positions and are underweight and there may be forced buying just as we saw forced selling in October into the October 31 fiscal year end.
There are only so many days left in the year for money managers so it may be do or die with window dressing into year end being the shoe on the other foot to the October 31 fiscal year end plunge
However, those who bought into the November 20 break and during the subsequent rally may sell into today’s surge. Not trimming here would seem to be the epitome of looking a gift horse in the mouth.
Conclusion.
I’ve been trading and timing the markets for over 30 years. This rally certainly has the whiff of front-running the news by ‘someone’ in the loop. Be that as it may, what got sentiment foaming at the mouth was Fed Chair Powell cooling on rates.
It is remarkable how addicted the Street is to low rates that are still at historic lows and how the threat of normalizing rates saw stocks have a tantrum… again. More and more, the market has become locked in a rinse and wash cycle driven by news with moves exaggerated by a lack of liquidity. Stocks are taken on the downside, then on the upside in a treacherous rinse and wash cycle.
For the moment Fear of Missing Out (FOMO) has replaced Fear of the Abyss (below 2600 SPX). This rally should generate the needed bullishness needed to setup the drop to lows well below 2500.
Strategy.
The market has marched directly to 2815ish without the benefit of a pullback first to walk off last weeks advance, that is a probably a more bearish picture than if we got a pullback before Sunday night’s rip.
Form Reading
One of the factors leading me to think that November 21 was a good test of the October 29th low (at least for the time being). Were the signal reversal bars/selling climaxes in many leading names. These include SQ, WDAY and W to mention a few.
All of these left large range Gilligan buy signals on November 20th. There are gaps down to new 60 day lows with a close near session highs.
Both WDAY and SPLK exploded on Friday and are great examples of Earnings Gap & Go/Bowling For Strike setups. In other words, they saw Gap & Go’s above strike levels following earning’s the night before.
In the premarket we sent a note to subscribers noting that SPLK could drive to 110 on crossing 105.
99.999% of traders have never even seen the Square of 9... let alone understand its potential.
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