Will the Stock Market Break Your Heart in September?

Trading this summer may best be described as trying to catch lightning in a bottle. Stocks have been caught in the jaws of geopolitical news events — mostly the U.S./China trade war, but also Hong Kong protests and an escalation in Mid-East tensions. Brexit and Italy have also played a role in thrashing stocks around like a rag doll in the grasp of a pitbull.

But is it the news events themselves or the reactions to the news that drives stocks?

After all, the trade war has been going on for more than a year. The song remains the same — treacherous selloffs followed by optimism about the trade war. The question is how many times can the market rally on misplaced optimism?

While the risks of an unconstrained trade conflict have grown significantly this past month, why did the SPX recover to test its highest levels of the month on Friday morning.

Despite being rejected from its 50 day moving average yet again on Friday morning, the SPX struck its 2nd highest close since August 8th to end the week.

It was only a week ago on Friday, August 23rd that markets plunged and were set to follow through the following Monday before talk of infamous “phone calls” regarding Chinese overtures.

Despite these reports being denied, the market continued the to rally last week.

I would suggest that the same way the market did not respond bearishly to the August 23 plumb-line drop directional cue,

It did not respond bullishly to the first Fed rate cut since December 2008 which occurred on July 31, 2019 — just prior to the market’s summer Cuisinart.

Why do we often see this phenomena in the markets where they do the opposite of what seems to be the “clear route?”

In the case of the first example above, it may be that the ruse of “China calling” may have thwarted the rare Friday/Monday air-pocket scenario once again….intentionally.

In the latter, it may be perception that the Fed's Sea Scrolls weren’t dovish enough.

I would say that that it is important to watch how market participants “behave” immediately as well as the subsequent day or two thereafter to any news “catalyst” or price catalyst for the next bigger market directional cue, rather than the event itself as over-analyzed by all the analysts.

Just as all price signals are not created equal — it is the behavior following a breakout or a breakdown that tells the tale, not the signal in and of itself.

As I like to say, speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way.

In my way of looking at markets, the news breaks with the cycles, not the other way around.

It is not about the latest news event or fundamental perspective which drives the market.

As legendary trader Bernard Baruch said years ago:

“All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking, our theories of economics leave much to be desired. It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature—a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea. It is a force wholly impalpable…yet, knowledge of it is necessary to right judgments on passing events.”

In my experience and research of the markets over a 35 year career, I have come to believe that there is an innate underlying structure to the market.

This structure is revealed in cycles of time and cycles of price and a fascinating synchronicity between the two.

“Synchronicity is an ever present reality for those who have eyes to see.”
Carl Jung

Volatility exploded in August much like it did last fall and much like it did in August 2015.

Below is a daily QQQ from late September in our report, The Hunt For Red October.

This shows the fractal nature of the market.

When these fractals occur into historic anniversaries — such as the end of August/early September 1929, 1987 tops and the secondary top in late August 2000 — important turns can play out.

Currently, the SPX dailies show a similar pattern of 3 drives to a lower high (not shown).

Within the context of these 3 drives to a lower high on the dailies, a weekly SPX below shows it is at a potential inflection point in this historic time frame, coincident with a possible Right Shoulder.

The above weeklies show the index has been skating below its December/June trendline break from the 2880-2900 region.

Last week’s highest weekly close since the August break ties to a backtest of the Dec/June trendline.

So we’re at an inflection point

Interestingly the breakdown from 2880 last October that started last fall’s massacre ties to the Dec/June trendline break at 2880 in August.

Checking a weekly DJIA is revealing. While the SPX has not turned its 3 Week Chart down by tracing out 3 consecutive lower weekly lows, the DJIA has done so.

On the week of Aug 12, the DJIA turned its Weekly Swing Chart back up (A) followed by a turn down in the weeklies (B).

Last week the Weekly Swing Chart turned back up on Thursday ( C ). Did it strike another high?

If so, another downturn could trigger a powerful triple bottom break or what I call a Rule of 4 Sell signal.

This would coincide with breakage of the December/June trendline.

The projection would be the region of the December/January lows.

Cycles point down.

The 4 year cycle is one half of one of the most consistent multi-year cycles in the stock averages — the 8-year cycle.

In July/August 2007, the market broke in what ultimately became a harbinger of the debacle that was to follow.

4 years later in July/August 2011, the market suffered a serious selloff. This was the last setback prior to a surge to new highs.

In July/August 2015, 4 years later, the market saw a greater sell-off.

Some markets bottomed in September. Some waited until October.

This October will be 8 years from the major October 2011 SPX low.

Cycles look set to exert their downside influence into October.

Last month’s volatility magnified the multi-month rallies and multi-month declines within a wide multi-year (20 month) trading range.

The intensity of the swings this past month suggests it is locked and loaded for a move out of the trading range.

Conclusion. Late last week, we flagged the likelihood of a Triangle Pendulum pattern with a false breakout through the top of a hourly triangle to be followed by a break through the bottom of the triangle in the 2900 region signaling a genuine directional move.

See hourly SPX here from Friday’s report:

As was the case in those instances in the summer/fall of 2015 and the fall of 2018, as volatility increases, investors become less inclined to take positions until they see a wash-out.

However, for the active, opportunistic trader, this summer has been a speculative bonanza… if you know what signals to look for.

When markets complete an advancing, impulsive structure as anticipated in July and go into a corrective structure, stocks and the averages become more wild with the kind of whipsaws we’ve witnessed.

Despite this whippy tape, the patterns and strategies within this corrective phase provide guidance for the next likely move.

This is one of the benefits to the Hit & Run Swing Method… whether in strongly trending tapes or highly volatile environments.

Our followers have been killing it… whether in the precious metals (see an $18K+ gain in gold) or in recent long swings such as ADPT and CRWD or short swings in TEAM, TSLA, GOOS and W.

There are going to be some great option plays — such as the AAPL puts, followers bought on July 21, booking a 4 fold gain within days.

Strategy. In the 4th quarter of 2018, the SPX declined 20%. The QQQ fell 22.7%.

Will lightning strike twice?

The averages are in a weak position.

The SPX left a Follow Through Day on August 13th and not only has the index failed to gain traction, the Aug 13, FTD was immediately offset with another authoritative stumble below Aug. 13 on August 23rd.

Former leaders such as TEAM, OKTA, COUP, ZS and TWLO show real distribution.

It feels like there is a lot of complacency on the heels of the most torrid rebound in history following last fall’s debacle.

Likewise there seems to be a lot of complacency since the market dodged a bullet last Monday on the heels of the previous Friday’s smash.

“I always say, complacency is the kiss of death.”
-Shari Redstone

Position in SPXS, SPXS calls