Why Friday’s Reversal Suggests A Down April

“Often times I have noticed when an item closes right on a square-out number it underscores the significance of that square-out. So it will be interesting to see if we get Train Tracks today with the SPX reversing back and closing below Wednesday’s low”

The above was written in Friday morning’s report.

The SPX memorialized Thursday’s SPX 2855 close with a Breakaway Gap & Go that indeed left Train Tracks with the index closing below Wednesday’s low pf 2924.

The SPX settled down 54 points scoring its worst loss of the year right off an all-time high on the important Friday weekly closing basis.

In so doing the index left weekly signal reversal bar—the second such bar in two weeks:The week of March 4th left a large range outside down week followed by a squeeze to a nominal new high.

It looks like the second mouse will get the cheese for the bears.

In other words the first sell signal often sees a squeeze with the second sell signal being the real deal:

The first mouse (the first sell signal) gets the squeeze, the second sell signal gets the cheese.

In Tuesdays report we stated, “…2855 is opposite the December 2346 low on what is called a Square of 9 Chart…a spiral number grid used by the legendary trader W.D. Gann. In fact 2855 is precisely 900 degrees up from 2346. We have the SPX advancing 900 degrees from low in synch with a possible 90 degree/day high to low to high cycle (September high/December low/March high).

As warned, a bearish tell was a break below the prior reference swing highs from February 25th and March 4th around the 2815 region. The SPX closed at 2800 right on its 20 day moving average.

While the SPX has proved resilient to any significant correction so far, as the above chart shows, the index is now testing steep trendline support and a decisive break/close below this will heighten risk of a corrective selloff to the lower rail of a trend channel near 2700.

Notice that the SPX closed right on the mid-channel as well as the 20 day m.a. so downside follow through suggests Moving Average Pinball could be in play with the SPX testing its 50 day moving average currently around 2734.

This ties to the last swing low in early March at 2722.

Since the 50 day line has not been tested at all this year on a pullback (it broke out above it in January but has not TESTED it on a pullback), it would not be surprising to see the 50 day m.a. undercut with a drop to the bottom of the trend channel in the 2700 region being satisfied.

However, remember the analogue from the March 2000 top in Friday’s report. In that instance the parabolic blow-out move into March 24th , once exhausted, saw a complete retracement to the breakout point.

Here, in 2019 that breakout point ties to the low 2600’s. This is the region where the SPX cleared a declining trendline connecting the October high and the December pivot high.

Given the big picture and the shorter term cycles outlined this month and the angle of attack to the downside from the 2855 square-out level, I would not be surprised to see the low to mid- 2600’s before the end of April.

Let’s zoom in to an hourly SPX.

The above hourly shows the SPX is in a vulnerable position closing below its mid-channel point.

The bottom of this hourly trend channel is around 2760.

This ties to 180 degree decline down from Friday’s recovery high for the move.

90 degrees down from high is 2807 so Friday’s weekly close below that level is a red flag.

180 degrees down is the aforesaid 2754 region.

270 degrees down is 2702.

360 degrees down is 2650.

So you can see the value in the Square of 9 to confirm more traditional technical analysis such as moving averages and trend channels.

A decisive break/close below 2754 targets 2702. A decisive break/close of 2754 targets a complete 360 degree decline to 2650.

This is just a 7% correction.

That is if a bullish corrective sell-off is on the table. A bearish C leg down implies a decline below the December low.

We have some projections and will spell those out this week.

Conclusion: It is a market of stocks not a stock market and as such we follow the leaders, the growth and speculative glamours.

Many of these “usual suspects” broke down on Friday.

Many left Kaiser Soze sell signals.

Keyser Soze was the illusive and ruthless character in the movie The Usual Suspects famous for its plot twists and reversals.

I refer to a Reversal of a Reversal as a Keyser Soze.

Friday was a decisive reversal of Thursday’s upside reversal on the heels of Wednesday’s Fed sell-off.

Fast moves come from false moves so caution is warranted.

Markets turn on a dime, most traders cannot.

As Keyser Soze’s alter ego in the movie said, “The greatest trick the devil ever pulled was convincing the world he didn’t exit.”

The market has done a superb job of getting players to think that a 3 month bear market played out last year.

However, if as they say, the biggest rallies occur in the midst of bear markets, then the 1st quarter rally may fit the bill.

Thursday’s spike did a good job of convincing players that a quarter-end mark-up was a fait accompli.

Perhaps the powers that be come into rescue the market into quarter-end like last quarter, but remember the market was down significantly into Christmas Eve.

Money managers could just as easily cut and run with quarter-end window undressing playing out into month-end this time around.

W is a glamour that turned on a dime on Friday.

W is one of the strongest leaders on the board. As the daily W below shows it knifed down from all time highs with authority on Friday. In so doing, W left a Key Reversal Week—from a new all time high it closed below the prior weeks low.

W closed decisively below its 20 day moving average on Friday.

Notice that the 20 day has acted as support throughout 2019.

I refer to pullbacks to the rising 20 day moving average as Holy Grail buy signals.

You can see why from the above chart.

In January, W reclaimed its 20 day and following a successful backtest of the 20, W rallied strongly.

A pullback to the 20 day m.a. occurred just prior to W’s earnings explosion on February 22nd.

On Friday in the Hit & Run trading room, we said to short W expecting follow through.

Initial support comes in at 150-151.

90 degrees down from the 174 high is 150 another 90 degree decrement down is 149-150.

If a serious market correction is on the table, W could pull back to the upper trend channel in league with the open gap as low as the 125 region.

Interestingly, 125.50 ties to a mid point of the W’s advance from its November low.

Strategy: Opening rallies following serious distribution days are not typically the stuff of reversals. The above hourly SPX shows a Bowtie of the 20/50 hour moving averages at 2829.

This region should define resistance for any rally attempt.

In addition to W, many glamours left reversals on Friday.

ZS left a Key Reversal Day.

TWLO left Train Tracks

AAPL left Train Tracks from its 200 day m.a.

TTD left Train Tracks

COUP left Train Tracks

CYBR left Train Tracks.

… To mention a few.

Moreover, the RUT topped on August 31st, 3 weeks ahead of the SPX. It has been leading the way.

On Friday it broke its 50 day m.a. decisively closing meaningfully below its prior swing low in early March.

This is an ugly picture and warrants caution.

Everyone knows that the SPX failed at the 2800 region 3 times in the 4th quarter resulting in 200 plus point plunges in each instance.

I can’t help but wonder if the market danced just enough in time and price above 2800 in the 1st quarter to instill complacency about this region.

Friday the SPX closed right at 2800 so this weeks quarter-end could be a doozy if many hedge funds bought at the end of December to scalp out in March with options expiration holding things up.

Given Friday’s angle of attack, the likelihood is the SPX 3 Day Chart will turn down with 3 consecutive lower daily lows.

If so, the ensuing behavior will give us a lot of information.

Last year April 2nd was a successful test low.

IF the market can hold up/rally into the end of March it may define a 1 year low to high cycle with a rollover.

Regardless of what happens into quarter-end, April looks like a larger drop.

Pos SPXS, W