Where the Market Rollercoaster May Go Next
The Square of 9 Wheel told me to key in on the 2634 level on Thursday.
The SPX skidded just below 2634 early in the session but as we tweeted, if it reversed back up through the morning low it would trigger a little Jack-Knife long. It did. And, it wasn’t so little. Down as much as 79 points the SPX closed down only 4 points.
When the first pullback following the upside reversal ‘held the line’—the level where an Opening Range Break occurred — a little inverse Head & Shoulders was on the table.
The inverse H&S projects to 2715.
Remember 2715 is the mid-point of the 11/23-12/3 upleg. I never ceased to be amazed by the innate geometry of the market. It’s magic is even more impressive given the volatility roller coaster of late.
The truth of the tape lies in technicals. The price action has not been about fundamentals and earnings. The fact that geometry and technical dominate the tape (along with cycles) is good news because if we can read the market as it presents itself, confidence in our strategies and methodologies should grow exponentially.
Long time readers have witnessed first hand how time and price revealed the reversal of fortune in the market in 2018 from a runaway train in January to a train wreck in Red October as forecast.
Long time readers recall that the 4th quarter was set to be one of panics based on the time and price cycles as indicated by the Square of 9. We showed the Square of 9 below several times earlier this year. It indicated panic would riddle the tape in the 4th quarter.
To recap, 2018 is 31 years from the October 1897 crash and 89 years from the 1929 crash. 31 squares the 1st week of November The implication was November would be panicky.
When we constructed the above wheel chart we did not know how the first week of November would play out. As it happened there was panic buying AND panic selling.
After the SPX made a new five month low in late October, the index panicked from 2603 to 2815 in SEVEN trading days. From the November 7th pivot high the SPX saw panic selling into November 20th—all the way back to 2631 in 9 trading days.
At the same time, 2018 is 89 years from the 1929 crash. 89 squares November 20- 21st (also the 10-year anniversary of the 2008 crash low). November 20th, 2018 marked a climatic selloff that tested the late October low.
The bulls looked at that low through the lens of a W Bottom driving the SPX from 2631 all the way back to 2800 in just six sessions. To say November has been a roller coaster would be an understatement..
It’s like a roller coaster on top of a casino. Indeed: it’s New York, New York casino in Las Vegas where there is a roller coaster on top of the casino.
Additionally, the all-time high this year at 2941 in late August aligned with 338, the late August high in 1987. So there were several time/price harmonics pointing to liquidating markets in the 4th quarter.
This indiscriminant selling forecast for the 4th quarter saw the first week of the new quarter, the first week of October, deliver an outside down week in the SPX. This lit the fuse. Then on October 10th the fireworks got going when the SPX knifed below its 50 day line.
Where do we go from here?
At the same time that 2634 was a key level for yesterday, an hourly SPX below shows how Thursday’s low set up for a possible reversal because the index tagged the low of an hourly channel following which it carved out Train Tracks, a reversal pattern.
Notice that Thursday’s reversal played out following a flush out below the little triple bottoms from Nov 20-23.
It sure looked like a debacle below 2600 was on the table when the SPX broke 2630; however, follow through, as always, is key. When there is none, there is a good chance for a reversal.
Notice the trifecta of hourly moving averages just above, that ties to the 2715 mid-point of the rally from the 11/23 low to the 12/3 high. It looks like the tortured path to a break of 2600 SPX will come when most market participants are convinced it’s not going to happen.
Be that as it may there is a potentially bullish case to be made in the Q’s. The reversal in QQQ was impressive turning green on the day as FANG got a nibble.
Arguably, one could say yesterday’s reversal in QQQ installed the right shoulder of an inverse Head & Shoulders.
Of course if Thursday’s lows should break meaningfully, it would be another case of a fast move coming from a false pattern. A failed inverse H & S will coincide with a decline below 2600 level of lore on the SPX.
When that occurs eventually (which I believe is the odds on scenario), I expect it to perpetuate a move to new lows, ie, below the 2532 low for 2018. IF a successful inverse H&S is in play then the green declining 3 point trendline near 74 is the Neckline.
Clearing 174 and holding gives a possible projection to 183. An early warning sign would occur if the Q’s recapture the declining red trendline from October now near 169. The Q broke above this same trendline on Monday but failed.
You know what I’m going to say: what if the 2nd mouse gets the cheese for the bulls.? In this roller coaster of a market we must consider the most improbable of curves.
While a big advance seems the short straw, it may be that Tuesday’s plunge was a the result of front-running the news of the arrest of a top executive of telecom giant Huawei.
Conclusion.
Thursday’s reversal setup based on the above 10 min and hourly patterns prompted us to send alerts to take positions in glamours such as MDB and SQ.
Follow through will be key.
It will be important to see how the market behaves on bleedback into yesterdays range…which is the more constructive pattern versus a gap up open that hit 2715.
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