“I was crowned with a spike right through my head.” – Rolling Stones, Jumpin’ Jack Flash
“She’s my daughter, she’s my sister.” – Chinatown
“What you’re getting is stimulus at the very wrong moment. It’s going to hit the economy in a big way this year and next, and then in 2020, Wile E. Coyote is going to go off the cliff and look down.” – Former Fed Chair Bernanke, May, 2018
In years to come, the scorching rally that started after the Coronavirus Plunge on Friday January 31 will be called the Coronavirus BTD.
Is the market really as smart as it looks? Is the last two weeks' rally discounting that the worst of the epidemic is behind us?
Or, is it possible that insiders and smart money were caught blindsided in late January and the rally was orchestrated as an exit?
Reports show Jeff Bezos sold $41 billion in AMZN stock in the last 10 days.
The coronavirus snapback reminds me of the China trade deal — we have a deal, we don’t have a deal, we have a deal, we don’t have a deal.
One day the virus is slowing, the next it's surging.
“Someone” has clearly learned to play the market… and the Algomatics… like a violin.
Be that as it may, the SPX roared back from the brink after kissing its 50 day line for the first time since October.
Happenstance or by design?
As a daily SPX below shows, when the index sustained a gap up above the Friday, January 31 massacre, it was signaling the fix was in.
A series of upside gaps followed, pushing the SPX to a new all-time high yesterday.
However, not every all-time new high is created equal.
It is common for a primary high to play out, followed by a sharp break and then a retest or secondary high, which often carves out a nominal new high.
Think July/October 2007.
The same is often true of bottoming patterns.
Think November 2008 primary bottom and March 2009 secondary/undercut low.
The same can be said for the major bear market bottom in 1974, when we got a primary bottom in October followed by a nominal new low and test on December 12, 1974.
We are a long way from confirming the idea of a major secondary top.
The SPX would have to violate its January low, the prior swing low, on a sustained basis.
However, the T-Rex in the ointment is that even in the bullish scheme of things, a sinister C-wave decline could undercut the January low, installing an important A B C correction.
This why I say a ‘sustained’ break of the 3214 region in order to indicate something more pernicious.
Nevertheless, 3214 is 160 SPX points down from Wednesday’s high.
Three price factors warrant caution with today’s Breakaway Gap which threatens to leave an Island Top in the SPX:
1) Today’s gap down, if maintained, follows a potential bearish backtest of a broken trendline.
As depicted on the above daily SPX, this trendline connects the October 3 low, the December 3 low and the January 6 low.
Notice the Breakaway Gap below this trendline on January 27.
2) This week's highs tested a rising trendline (magenta), connecting the November highs and the January highs.
3) The SPX has satisfied a Measured Move. In other words, the leg up from the December low ties to the leg up from October to late November.
How will we be able to gauge the significance of a setback? How will we know if it’s a hurricane or a squall?
My Swing Method for determining the path of least resistance revolves around the 3 Day Chart and the 3 Week Chart
If the 3 Day Chart turns down (with 3 consecutive lower daily lows) and the market remains under pressure, this points the way lower… potentially to below 3200 in the aforesaid C-wave scenario.
The 3 Week Chart has not turned down since the week of December 17, 2018.
It has been pointing up for over a year and is stretched historically and due to turn down.
This in and of itself is a reason for defense… especially given that many big cap elephants such as MSFT and AAPL have recently run like cheetahs.
The next time the 3 Week Chart turns down will tell the tale of the tape in the big picture.
Where and when that will occur is conjecture.
But as is evident from the action in the 4th quarter of 2018, you don’t want to be riding a decline into a turndown of the 3 Week Chart to tell you that the major trend is intact.
To wit, checking a weekly SPX shows that breakage below January’s low will trigger a weekly Rule of 4 Sell signal… a break below a 3 point trendline.
So the January low is critical, not just because it is the last swing low, but because it also ties to a 3 point rising trendline.
Importantly, trade below the January low this month will turn the Monthly Swing Chart down.
That seems far-fetched to occur in February given there are only 2 weeks left this month; however, IF it should occur, the ensuing behavior will be important to observe.
History suggests that usually (not always) a turndown in the Monthly Swing Chart sees a knee-jerk reaction (to the topside), even in the bearish case.
More likely is that a turn down of the monthlies, if that is Mr. Market’s agenda, will occur in March on trade below whatever February’s lows turn out to be.
The last time the Monthly Swing Chart turned down was in October 2019.
The index carved out an immediate low, a bullish sign, and proceeded to trace out an outside up month… a further bullish sign.
October’s outside up month perpetuated the current vertical price cyclone.
So you can see how important the Monthly Swing Chart is for determining trend.
Taken together, the Weekly and Monthly Swing Charts reveal the path of least resistance using TIME versus PRICE.
In other words, it is not where these charts turn down that is telling, but rather their subsequent behavior WHEN they turn up or down.
Conclusion. Wednesday’s report pointed out that the most valuable U.S. stock, MSFT left multiple sell signals on Tuesday:
A Gilligan sell signal, which is a gap up to a new 60 day high followed by a close at/near session lows. MSFT also left Train Tracks on Monday/Tuesday… a large range rally day followed immediately by a large range sell day, which engulfs the prior day’s action.
MSFT looks vulnerable to an open gap in the 174-175 region, which ties to its 20 day m.a.
Into the Q1 2000 Bubble Top, MSFT spiked 30% in 3 weeks.
It just spiked 20% in 3 weeks.
AAPL is another mega-cap that has run like a cheetah.
AAPL ran up a Gann 90 points after breaking out and carving out an outside up month in October.
It ran from 237 to 327, where it squared-out as flagged in this space at the time.
AAPL pulled back all the way to 302 this month before setting a new closing high yesterday… but not a new all-time intraday high.
Is it possible AAPL carved out a secondary high on Wednesday?
Institutions favor large-cap growth when the market is stretched (the SPX hasn’t seen a 20% correction in years).
This speaks to the outperformance in names like MSFT and AAPL and the NDX.
This is part and parcel for a mature bull market as fund managers look to lower their risk by trimming small and medium cap issues in favor of more liquid glamours.
Not all the MAGA/FANG’s are sprinting.
FB is faltering.
A daily FB illustrates its behavior in accordance with the 3 Day Chart Swing Method.
FB has carved out what looks to be a Head & Shoulders top.
Downside follow through from here points the way to the 200 day moving average around 193.
Likewise, breakage below 203 projects to 183.
The generals are often the last ones standing at the end of a bull run.
So when they bend, the trend may no longer be your friend.
That said, subscribers have benefitted handsomely in recent weeks in long swings in strongly trending mid-cap and small cap names we traffic in such as ACMR, LITE, GSX, CDLX and OYST to mention a few.
Even as rotation into the more liquid names plays out, smaller cap names can be explosive swing and day trades if you can pinpoint the entries. This is because there are fewer of these that setup as the market becomes stretched — but just as much money focusing on fewer setups translates into explosions.
This is especially true of recent hot IPO’s.
For example, we saw our old friend PGNY coming out yesterday morning and alerted subscribers on the Hit & Run private Twitter feed to take it long.
Yesterday, PGNY tacked on over 3.25 points to close at a new high.
When an IPO comes out, there is little to no overhead supply combined with a ripe story to capture the imagination. These two factors often create a fast path of least resistance.
For example, members took a long in SDGR yesterday, which came just came public and shows a Hot IPO Pullback setup
Strategy. SPX support is the prior resistance in the 3333 region. Prior resistance should act as new support. If not, welcome to the breakfast show.
Pos FB puts, PGNY, SDGR, IWM puts