Is the Rally for Real?
“The tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it today, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now—not tomorrow. The reason can wait.”
-Jesse Livermore
The market is in a two day rally off a deeply oversold condition following the SPX testing its March low and an undercut and recapture of its 200 day moving average.
On Wednesday, the SPX carved out 2 consecutive higher daily highs with the 3 Day Chart pointing down which puts the index in my Minus One/Plus Two sell position.
This puts us on high alert. The same pattern played out in mid-May. Then, the SPX went on to trace out 3 consecutive higher daily highs turning its 3 Day Chart up.
That turn up defined a high confirming the trend was down.
The same thing could occur today…whether or not the 3 Day Chart turns up, it will be an opportunity to take the market’s temperature here.
If the SPX wants to make 3 consecutive higher daily highs today, then the level of interest is 2834.
This is 180 degrees up from Monday’s low.
Note that the arrows are pointing to 729 which is 2729 in the outer rung. Straight across and opposite is 834 for 2834.
AAPL led the way down, topping on May 1 along with the SPX, and should be a big tell here.
On Wednesday, I called a short on AAPL as it tested its declining 20 day moving average (for a Holy Grail sell signal) in tandem with satisfying a 90 degree advance off Monday’s 170 low.
90 degrees up from 170 is 184, our short area.
Notice that 170 aligns with May 1st. Consequently, Monday’s large range drop to 170 was a time/price square-out with the high day (May 1t) pointing to the low price…for the moment.
Time points to price. Price points to time.
Interestingly, AAPL’s square-out on Monday was underpinned by a large range day which smacked of at least a short-term selling climax or selling exhaustion.
178.50 is the mid-point of AAPL’s 2019 advance.
A pullback to this region could define near term support.
This is where we are looking to cover at least half our short position.
Notice that 178 is square June 6th as depicted in the Square of 9 above.
What is intriguing in this rally is the action in the growth glamours. In Tuesday morning’s report, we offered that Monday’s give up in many marquee names such as TWLO, CYBR, MDB and TEAM could either mark short-term capitulation — selling exhaustion — or accelerated downside momentum.
We didn’t have to wait long for the answer.
These titles and other leaders came roaring back in the last two days.
What changed from Monday’s low that elicited rip your face off rallies in many leading names and a 100 point SPX rally in 2 days?
In a word, the Fed.
But did the Fed really say anything new? In December we had the Powell Pivot and the market proceeded to discount the Fed’s change in complexion into the end of April.
What’s new? What is the market discounting in regards to the Fed now?
From my perch, it’s reminiscent of the times the market discounted a “beautiful deal with China” this year.
How many times can the market discount the same news… without any news being made?
The action of the last two days underscores that as traders you have to shoot first and ask questions later.
You have to Hit & Run. If you wait for confirmation, a huge opportunity can be missed.
A trader has to be tactical within the context of a bigger picture strategy.
This is the key to my Hit & Run methodology. Regardless of whether I may be intellectually bearish and have a strategic big picture opinion, I don’t let that interfere with being opportunistic and tactical on a day trading or swing basis.
After all, the truism is that the sharpest rallies often occur in the midst of a bear market and that the sharpest corrections often occur in the midst of a bull market.
We want to take advantage of those moves — which means taking actionable setups on a tactical basis.
For example, we called an audible long swing in AVLR on Wednesday on the Hit & Run private twitter feed.
Why did the market explode off Monday’s lows? Well the Fed was very opportunistic with its full frontal doveishness on Monday — stepping up to the plate as the SPX tested its March lows on an undercut its 200 day moving average.
They must be terrified of something to feel the need to circle the wagons on the break of the 200 day m.a.
Remembering the market’s V-Thrust of its Christmas low, market participants jumped in to stocks before the Fed Silver Streak left the station without them.
If the rally is not for real, players will have buyer’s remorse soon because the SPX, NAZ, and DJIA all may be working on the right shoulder of large Head & Shoulder top formations.
That means that if this rally fails to hold the Necklines (the 2800 region in the case of the SPX), stocks could decline sharply into at least the end of June according to our cycle work.
It means the SPX could test/undercut its December low…possibly later this month in a waterfall decline.
It is remarkable how once again this 2800 level has become an important inflection point.
Last fall, the SPX carved out triple tops at the 2800 region which led to the December Massacre.
Now a decisive break of 2800 could see an air pocket.
The alternative is that the SPX clears 2841 decisively on a closing basis. That points to potential for nominal new high to 3000.
Conclusion. Like the first pullback off the V-Thrust in early January, the next pullback which ideally should play out from the SPX Holy Grail sell setup (declining 20 day moving average) and tell us if the rally, perpetuated by the Fed, is real.
The underlying question is whether the Fed is for real.
Fellow friend and trader and former investment banker, Ben Bush, sent me the following note yesterday:
“The FED by continuing its policy of suppressing rates and propping markets now further embeds socialism and central planning into its architecture. Under the guise of low unemployment and 2% inflation mandate, the FED has taken the reigns from the free market and undermined capitalism in favor of maintaining flawed business models. As rates approach the zero bound, companies are valued at extremes because any revenue can be used to subsidize losses through close to zero interest borrowing. As an example if a company loses $1B but shows revenue growth the current thinking is they will capture market share and eventually make money.
No business can survive under that scenario, but if the losses can be financed for close to nothing, ZIRP/QE perpetuate the myth of growth. Workers are forced into the sharing economy and employment thrives through “central planning.”
Sound familiar to Communism/socialism? Central Banks have created an environment where GDP/economic growth is monetized through debt to subsidize the ability to consume, pulling demand forward, forcing retirees to spend retirement savings instead of earning interest in which to spend. Companies with real earnings realize that it is better to prop their stock prices instead of investing in the future. Stock buybacks are another form of creating the myth of a “feel good” economy by pulling demand for equities forward. The Fallacy of the Central Banks exists in the narrative that they know what they are doing and what is best. All Communist/Socialist countries have gone down this path, and the result is always the same.”
Strategy. Until proven otherwise, when this rally is over, it is likely to see much lower prices in coming weeks.
Position in AAPL
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