In January 2019, I outlined the potential for a move to above 3000 SPX — IF the index cleared a 50% retrace of the 2940.91 September 2018 peak to the 2346.58 December 2018 low, this was a range of 594.33 points which gave a mid-point of 2643.75.
In my 30+ year trading career, I have noticed that reclaiming the region of a 50% retrace often implies a new leg up is underway — be it in an individual stock or an index or ETF.
Markets seek equilibrium, so once this 50% ‘balance point’ is recaptured on a sustained basis, it typically means the prior decline was a washout where everyone that wanted or needed to sell has sold.
That means that there is ease of movement and ‘blue sky’ once the market scales the geometry by successfully regaining 50% of the prior decline.
The SPX regained this 2643.75 region quickly — in the week of January 14, just 3 weeks after the Christmas Eve closing low for the 2018 decline.
The same week the SPX recaptured this 50% retrace, it also turned its 3 Week Chart back up.
The market was speaking.
In fact, the SPX 3 Week Chart has remained pointing up since the week of January 14.
Essentially it has been up all year. This is an extreme situation.
The last time we saw such an extreme was last December. The resolution saw the 3 Week Chart finally turn down with a waterfall decline.
The majority of the time, the market does not play out in such extremes with the 3 Week Chart remaining up for nearly a year. When these ‘stretches’ play out and markets exceed normal expectations it turns bullishness to extremes.
Extremes are tempting, but treacherous.
As W.D. Gann stated, “The most money is made when fast moves and extreme fluctuations occur at the end of major cycles.”
Following the turn up of the 3 Week Chart on the week of January 14, 2019, we got a relentless advance to a new all-time high at 2954 in late April.
The late April top was 7 months after the late September 2018 top.
After the relentless advance, this 7 month cycle combined with a test of the prior September top perpetuated a sharp 4 week 7% sell-off into June 3. This provided the first test of the 50 week moving average since the upswing started.
From there, a wide and loose trading range played out with a pullback into October 3.
This carved out a 3rd higher low on the weeklies from the big December 2018 low.
Fast advances often play out from 3rd higher lows — on all time frames — and that’s what we got in spades:
A runaway move persisted… until late November.
Late November is an important time period as it is was 7 months from the late April top.
Remember the late April top precipitated a quick 7% decline.
The SPX broke from a late November high in keeping with a possible 7 month high high to high to high cycle — September 2018 to April 2019 to November 2019.
Last weeks break followed my Volatility Explosion signal.
Additionally, a 200/20 Mean Reversion signal played out. This is because (as noted in this space) the SPX was extended more than 5 to 7% above its 200 day which, when followed by a reversal below the 20 day moving average, often sees significant declines.
By significant I mean on the order of at least 10%.
Despite the SPX’s Breakaway Gap below its 20 day moving average on Tuesday, after two Pause Days on Wednesday and Thursday, the index ripped toward its all time high on Friday’s NFP.
In Friday morning’s report, Technicals Indicate Today’s NFP May Be A Catalyst For A Resumption Of Volatility, we showed a weekly SPX with last weeks backtest of a near two year tops trendline stating, “It is too early to say whether the reversal from the late November peak is a significant top or just a backtest of the breakout point.”
Last weeks decline looks similar to the March 8 low where, following a persistent run, the SPX undercut its 20 day m.a. and recovered immediately, pointing the way higher.
The question is whether a similar pattern is on the table or whether the SPX is tracing out a test of its late November cycle high.
Somewhat above the 3154 November 27 high is a region that indicates the potential for a perfected time/price square-out — a region that squares-out with the October 3 low and last year’s December low.
If this is the case, the implication is a decline to the 50 day moving average and the 3040 region is on the table — satisfying an A B C decline.
Conclusion. The market has been in a runaway move since early October and often (not always) runaway moves culminate in 90+ calendar days. This was the case in two of the most famous blow-off moves, 1929 and 1927.
That would take the market up into early January in keeping with a possible one year low to high cycle as well.
As long as the market holds above last weeks lows, it looks like it will take until January to make its true intentions known.
Runaway moves tempt market participants to turn a blind-eye to risk. They lure players into thinking the market is a no-brainer, a slam-dunk.
This was the case with the internet stocks in 1999.
Today, it’s the biotech stocks dancing the conga, lurching this way and that, fanning the flames of speculative fever.
Strategy. It looks like there are two alternatives on the table:
1) Last week's turn down in the 3 Day Chart in tandem with an undercut of the 20 day moving average low mirrors the March 8 low and we’ll get a continuation of the rally.
2) The SPX is carving out a topping pattern mirroring the late July top when the 3 Day Chart turned down in mid-July and a top was marked with a nominal new high test failure on July 26.
Trade back below the 20 day moving average and last week's low will point the way down to the 3040 region, satisfying an A B C decline.
Trade below 3040 implies a push toward 2900 in keeping with the pattern in late July, which precipitated a 200 point SPX drop in 6 days.