“The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.” – Jesse Livermore
“It is not good to be too curious about all the reasons behind price movements.” – Jesse Livermore
“I don’t know what it is that I like about you
But I like it a lot.” – Communication Breakdown, Led Zeppelin
April posted the best month since January 1987.
What a difference a day makes.
The first day of May is starting out with a mayday distress call.
Just as 1987 started out with a bang, it ultimately led to one of the greatest crashes in history, I can’t help but wonder if the 2nd quarter’s historic rally will lead to another great crash.
New tensions between the U.S. and China as well as disappointment over AMZN and AAPL earnings are weighing on sentiment today… if you needed a reason for this morning’s downdraft. That said, if you know how to read the market's tea leaves, the technicals were telegraphing today’s downturn.
Let’s take a look at how IWM, The Truth Teller, telegraphed rising risk into Wednesday’s sharp rally.
I call IWM The Truth Teller because the structure in IWM, the RUT ETF, is often much clearer and cleaner than that of the SPX.
Succinctly, a daily IWM for 2020 shows 3 drives to the top of a trend channel that satisfied a full 360 degree advance off the low.
From a March 19 low of 95.69, IWM struck a high of 136.84 on Wednesday.
The following image of a Square of 9 shows that 137 represents 1 full square or 360 degree cycle up from 95.
The expectation is for a reaction to follow.
Green is 95
Blue is 137
Consequently, yesterday we alerted members on the Hit & Run private Twitter feed to take a long position in TZA, a triple short ETF on IWM.
We got filled at 33.29.
This morning, as I write hours before the open, TZA is trading over 36.
The decision to make a leveraged bet was underpinned by the fact that IWM showed 3 drives up to natural resistance at the upper rail of a trend channel.
Markets often play out in ‘threes,’ so this third drive up to well-defined resistance set up an aggressive downside play.
Additionally, Wednesday’s high probed the Breakaway Gap from March 9 — the heart of March’s waterfall decline.
Markets often return to such pivot points where the ‘bodies are buried.’
My analysis indicated that IWM could be on a fast track to 125.50.
Why?
125.50 represents 90 degrees down from Wednesday’s high.
It also ties to the IWM 50 day moving average.
With today being a weekly options expiration, I felt there was a strong likelihood of follow through today toward the 125 IWM strike.
This morning, IWM is trading at 127.10 down 3.20.
If IWM follows through below its 50 day moving average, the presumption is it will test the bottom of the trend channel at 120 over coming days/weeks.
Just below 120 is the important 50% retrace of the entire advance of the March low at 116.27.
Markets seek equilibrium.
Once price declines past the midpoint of this rally, market participants will view stocks to be in a bear market.
This same point of recognition by investors in the aggregate as to the SPX is 2673. That is the midpoint of the rebound.
However, 2792 represents the mid-point of the entire waterfall decline.
2792 ties closely to a 50/20 Bowtie. This is the 2773 region where currently the 50 and 20 day moving averages are converging.
Consequently, breakage below 2792 that is sustained implies an extension to 2673 SPX.
The takeaway is there could be a 100 point air pocket on a knife below this 2770-2790 region.
This would tie to a decline in IWM to the aforesaid 116-120 region.
