“I was feeling kind of seasick, but the crowd called out for more.” – Procol Harum, A Whiter Shade of Pale
“The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.” Gustav Le Bon, The Crowd
“All economic movements, by their very nature, are motivated by crowd psychology.” Bernard Baruch
In the October 30 report, Does Green October Mean the Coast Is Clear Until Year End?, we recapped the significance of the critical 3013 to 3025 region first identified last July.
I want to walk through it once more because this level could be tested in a panicky downdraft — perhaps more quickly than most market participants would expect.
1) The major bear market low occurred in early August 1982 at 102 SPX.
The range from the August 1982 low to the major March 2000 top at 1553 is 1451 points.
Multiplying 1451 by Phi (1.618) gives 2347.
2347 + 666 = 3013.
Both the 1451 and the 2347 region were proved as important by the market:
The crash in 2008 began from the lower high around 1451.
2347 ties to the Christmas Crash low of 2346 in 2018.
2) 3025 is 55 squared. It is a natural level of support or resistance according to the Gann Principle of Squares.
Additionally, 55 is a critical number in Gann Methodology that ties to a ‘panic zone’.
For example, the crashes in 1929 and 1987 occurred approximately 55 days from high.
The SPX pulled back 200 points after striking a closing high of 3025 in July 2019.
It rallied up to 3020 in September and pulled back to 2855 on October 3, where it left bullish Train Tracks.
Those Train Tracks were the locomotive for the runaway train into January 22, where the SPX left a Gilligan sell signal — a gap up to a new 60 day high (3337) with a close at/near session lows.
The October 25 breakout above the July/September double tops and the key 3025 region sparked an blow-out move into January 22 — satisfying our presumption of a 90 day blow-off made in this space in early December.
It’s hard to predict the market, but that doesn’t mean the path to doing so doesn’t exist.
The endeavor is worthwhile because:
1) Risk comes fast
2) As Paul Tudor Jones says, “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle.”
Throughout January, we’ve been looking at this 3330-40 region as a potential top of some importance in our morning report.
We showed a Square of 9 that ties the 94-95 SPX bottom from 1980 and the 1576 top from 2007 to 3329.
Green arrow is 94-95
Red arrow is 1576
Blue arrow is 3329
So far, the closing weekly high has been 3329.
From the 1553 top in 2000 to the 666 low in 2009 (encompassing an A B C decline) is a range of 887 points.
Adding 887 to the 20 year cycle top of 1553 gives 2440 (close to the closing weekly low in December 2018).
Adding this same 887 point range to 2440 gives 3327.
In the January 21 report, The Lines In the Sand Are Drawn, we showed how 2241 squares-out with the 666 bear market low.
Red arrow is 666
Blue arrow is 3340-41
We also showed how 3333 is straight across and opposite December 26, the big low in 2018.
Green arrow is December 26
Red arrow is 3333
In Gann Methodology, time points to price, price points to time.
The angle of attack to the downside that started on Friday and looks like it is following through given the action of the futes on Sunday night underpins the significance of the aforesaid cluster of square-outs.
In my experience, when the market reverses decisively from a square-out, it is talking.
In the January 21 report we went on to state, “The presumption is a reversal window somewhere between 3330-3341. With the first monthly options expiration for 2020 in the books, this week would be the ideal time for a turn with the SPX more extended from its 50 day line than at any time since late January 2018.
The late November high was 3150. The 50 day moving average is currently at 3177.”
A retrace to the 482 point range off the early October low is 3097.
As the weekly SPX below shows, this level ties to the high of the breakout point in late October as well as a rising weekly trendline in addition to the rising 20 week moving average (3116).
The 20 week moving average hasn’t been tested during the entire advance.
Consequently, with the market having gotten so stretched and an excuse for profit taking in the way of the China Coronavirus, a pullback to the 3075-3116 region is logical.
While that seems a long way down, it is just above the July/September double tops at 3025ish.
If panicky selling shows up, a downdraft to 3025 to 3100 may be in play.
As the chart above depicts, the SPX is as stretched from its 50 week moving average as it was in late January 2018.
In January 2018, the SPX was 374 points above its 50 week m.a.
At last week's ATHs, the SPX was almost an identical 354 points above its 50 week m.a.
I would not underestimate the potential for the SPX to visit its 50 week moving average, currently 2979… quickly.
A decline toward the 50 week, as occurred off the late January 2018 top, would fully satisfy a test of the aforesaid key 3000 region.
I don’t know if we’re going to get panicky selling off last week’s high, but the fuse of time, price and sentiment implied a turn and the China Coronavirus may be the catalyst to light that fuse.
Time-wise, the topping sequence is similar to 2000 and 1973.
This ties to the Gann 20 year cycle and the Gann 90 year cycle.
20 years ago was the top in the 1st quarter of 2000.
90 years ago was the top in 1929.
Half that 90 year cycle is 45 years.
45 years from 1929 is 1974 and the major bear market low in late ’74.
Another 45 years is late 2019.
Of course, the false breakout blow-off rally into January 1973 was the top that preceded the 2 year bear market into late 1974.
It must be said that the initial leg down off the 1973 high was 10%.
A 10% drop from last week's high ties to the aforesaid important 3300 region.
Semiconductors lead and SMH left a large range Gilligan sell signal on Friday.
It projects to 142.
Biotechs were the tip of the sword of speculative sentiment in the October-January rally, but IBB knifed with authority below its 50 day line on Friday.
It has a projection to the 110 region.
The elements for panic are present.
Ever since the markets in stocks began, panics have been a periodic phenomenon. Lenin, in the days of the Russian Revolution, noted that the business cycle was a crime to be eliminated in the perfect world of future communism. It is strange and disconcerting that today’s Fed aims to be trying to iron out the business cycle and that many of our politicians are embracing thinking identical to Lenin 100 years ago.
It seems our politicians and the powers that be want to make the business cycle a criminal offense.
Mother Nature has a way of exerting her revenge.
Cycles will not be denied.
By definition, panics are a consequence of human nature.
It seems that the politicians of this century believe they can iron out the business cycle for all time.
In so doing, they are denying the nature of the beast, and all they are doing is prolonging prosperity at the expense of future chaos.
There are those who survive and even prosper in a panic.
They do so by having studied the psychology of the past, of those who have instinctively done the wrong thing.
“The conscious life of the mind is of small importance in comparison with its unconscious life.” – Gustave Le Bon
It must be understood that panic is a primitive emotion hardwired into our subconscious.
Because of our primitive heritage we have the ability to panic built into us as a protective instinct, not as a device for our destruction.
Emotion produces within our bodies powers it does not normally have.
For example, primitive man faced with a tiger could run much faster than he normally could.
This was how he survived.
If there was no place to run, then the adrenaline-fueled power gave man fighting ability.
The problem is in modern civilization; panics do not require physical exertion.
So, because man uses less physical energy, man seems incapable of determining when the need to panic is OVER.
It is as if primitive man, when he escaped from the tiger, used his extra energy to run, but would drop from overexertion.
Modern man, when he takes flight metaphorically, just doesn’t stop running.
So, we can end up with a panic being much bigger than the reason for the panic would warrant.
Consequently, we have rule number one for beating a panic: never underestimate its size.
Don’t rely on the idea of what a ‘reasonable reaction’ is when a crowd is faced with a tiger versus one man.
The second rule is never underestimate the power of the politician to drive things much further… in either direction.
In times of panic, one has to cease to be an investor and become a psychologist.
Value of stocks and PE ratios mean very little.
What matters is the panic factor in human nature and the idea that the politicians think they are in control of man’s nature.
When you talk about panics and crashes to most people, it quickly becomes clear that they have heard only of 1929.
1987, as much as it scared the psyche of traders that lived through it, is dismissed as it did not lead to an economic downturn.
Although the crash of 2008 did cause a significant economic downturn, it too is mostly dismissed, given that bear market lasted roughly a year and a half versus the Great Depression of the 1930s.
Indeed, the SPX reclaimed its 2007 peak 6 years later, whereas it took the market 25 years to clear its 1929 peak.
This underpins the idea that the Fed and politicians have gained control of the business cycle.
In the 21st century, the market has come back from two panics which have served to do two things:
1) It has made a religion of the phrases, “Don’t Fight the Fed” and “Buy & Hold”.
2) Since the retail investor has had his teeth kicked in twice in the last 20 years with stock picking, he has turned to the passive investing of ETFs, seeing that you cannot beat “The Market” by picking individual stocks. The last year’s virtually cult buying of AAPL being the possible exception as AAPL has become a de facto money market fund. The upshot of this passive ETF love affair is that when redemptions hit, the ETF sell orders will hit the underlying stocks just as indiscriminately as was the way up.
More so in a panic.
The fact is that in the history of the U.S. stock market, there has been a major panic every twenty years.
There have been minor panics every 5 to 10 years.
What this means is that unless an investor was too stupid to be frightened when a panic happened or unless you understood the storm clouds for a panic and sold at the right time, the whole concept of making money in the market is a myth.
In order to make money consistently in the market… and keep it… the panic factor should be studied.
Conclusion. The news breaks with the cycles. The cycles suggest a turndown. Whether that entails disorderly selling, panic, remains to be seen.
Friday saw orderly selling. However parabolic moves often return to their point of origin.
This means a retreat to the 3000 region or a normal 10% decline.
If this idea takes hold, a 10% decline could play out in a not-so-normal time frame.
In early 2018, a 12% decline played out in 10 trading days.
In late 2018, a 16% decline played out in 16 trading days.
Because it is often difficult to identify intrinsic values in real life markets, bubbles are often conclusively observed only in retrospect, once a sudden drop in price has occurred.
In fact, all bubbles and financial manias end with a crash and not an orderly decline. This is due to a large concentration of investments at the same time in a select group of stocks (FAANG’s) making the market top-heavy and a massive imbalance between buyers and sellers at the time of the turning point.
As history teaches us, at the peak, there are a large number of investors sitting on massive unrealized profits, and the last leg of vertical appreciation happens because there is a lack of sellers as all the sellers that sold before the peak were proved wrong.
Then, when price peaks, all the investors that were sitting on this string of unrealized gains rush to the exit to cash in their profits at the same time there is a lack of buyers.
This is because valuations are so high that buyers keep their wallets on their hip until they see a significant decline — typically a pullback to the breakout point… in this case the 3000 region.
VXX, a volatility ETN, signaled a possible rush to the exits in carving out a large range outside up day on Friday when it crossed above 14.
Subscribers bought February 21 14 calls as VXX traded at 14.
Strategy. Underscoring the idea of a meaningful turning point is that the NAZ and NDX both left large range Key Reversal Days on Friday. This means they made 52 week highs, but closed below the prior day’s low.
The largest decline in the SPX since the rally started in October has been 84 points.
Any decline by the SPX on a closing basis of more than 84 points represents an overbalance, which is another factor pointing to a top of some degree.
84 points off the SPX ATH is 3254.
This ties to the January 2 high of 3258.
This is where the futures are trading on Sunday night as I write.
If the advanced is “over-balanced,” it points the way to a complete retrace to the 3000 region.
Pos VXX calls, IWM puts