Why Monday Is the Most Important Day Since the March 23 Low
- May 4, 2020
- / By Jeff Cooper
“And you can send me dead flowers every morning
Send me dead flowers by the mail.” – Dead Flowers, The Rolling Stones
“Everyone hopes a buyer will come along who’s willing to overpay for what they have for sale. But certainly the hoped-for arrival of this sucker can’t be counted on. Unlike having an underpriced asset move to its fair value, expecting appreciation on the part of a fairly priced or overpriced asset requires irrationality on the part of buyers that absolutely cannot be considered dependable.” – Howard Marks
“Successful traders always follow the Line Of Least Resistance.” – Jesse Livermore
“The value of certain things have decreased. Our airlines position was a mistake. Berkshire is worth less today because I took that position… there are other decisions like that. The future is much less clear to me.” – Warren Buffett, May 3, 2020
I suppose when an oracle says the future is much less clear, one must listen… even if the oracle is owning up to a mistake.
Buffet’s comments are a rude awakening for the perma-bulls who have been assuming that Buffett’s silence during the Corona Crash meant he was on the prowl scooping up bargains.
Instead, Warren Buffett took advantage of the market rebound in April, selling $6.5 billion in equities.
It will be most interesting to see the market’s reaction by Monday’s close.
Will Wall Street’s bulls follow the Pied Piper of Buy & Hold into Sell-ville?
Is it possible Friday was folks in the loop dumping stocks in front of The Oracle’s pronouncement?
I can’t help but wonder whether Warren’s own words will be the catalyst for another shoe to drop, perversely allowing Berkshire to step into the fray with his new horde of cash to put to work.
“… 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 wrote the above in Friday morning’s report, MAYDAY MAYDAY, at 3:30 a.m. Friday morning from my home office in Malibu… just as I do every day.
We spend 12 hours a day analyzing and trading the markets. You don’t want off the cuff, seat of the pants, dyed in the wool-bull based Wall Street analysis at critical times such as this.
You can’t afford to be without thoughtful, experienced analysis in critical and opportunistic times like this.
Unlike some “savvy soothsayer” market observers, we actually trade the market throughout the day.
This is important because there’s nothing like being in the action to truly ‘get’ the action.
My daily work ethic is backstopped by over 35 years of experience in financial markets, starting from my days at the famous Drexel Burnham office in Beverly Hills to my dad’s hedge fund.
Members got stopped out of a long position in TZA on Wednesday’s rally; however, we reloaded on Thursday just in time for Friday’s plunge.
In my experience, one of the most important trading rules is to be willing to get back into a trade if it revalidates.
This is because the talented Mr. Market is fond of fake-outs. Allow me to explain.
Often the market will generate a signal, as it did with a sell signal on Tuesday, but then it will squeeze players who jumped on the first signal.
I like to say, the first mouse gets the squeeze, the second mouse gets the cheese.
You have to believe what you see in the markets, and traders, including ourselves and our members, took Tuesday’s sell signal and got stopped out on Wednesday. However, we reloaded on Wednesday when it was clear that IWM was leaving what I call a Fantasy Island sell signal.
A Fantasy Island is in the spirit of an Island Top, but the gap down (on Thursday) is within the range of the prior day’s bar.
When a perfectly good setup remains intact, it is important to revisit the setup if it looks like it’s going to play out the second or third time around.
Friday morning’s report showed that IWM had carved out 3 drives to the top of a trend channel into an open gap.
Consequently, on Thursday, we alerted members on our Hit & Run private Twitter feed to take TZA long (a 3X leveraged short bet on IWM).
We got filled at 33.29.
As offered at the time, “my analysis indicated that IWM could be on a fast track to 125.50.”
On Friday, IWM traded as low as 123.29 before settling at 125.14, propelling TZA to a high of 39.05.
An hourly SPX shows how it aligned with IWM in telegraphing a drop on Friday.
Thursday, the SPX spent the day skating below its 20 hour moving average coincident with the bottom of a short-term trend channel… breakage below which would trigger an hourly Rule of 4 Sell signal.
From my perch, a blaring sell setup was on the table.
On Friday, a Breakaway Gap saw the SPX violate its 50 hour moving average, leaving the index vulnerable to an extension lower today.
Be that as it may, by my reckoning of how to determine Livermore’s Line of Least Resistance, Monday is set to be the most important day in the market since the rebound started from the SPX March 23 low.
This is because if the SPX trades below Friday’s low today (which is indicated by the action in the futes overnight) it will be the first time the SPX 3 Day Chart will turn down since the March 23 low.
The SPX 3 Day Chart turns down with 3 consecutive lower intraday lows.
Checking a daily SPX shows that this has not occurred since the rebound started.
At the same time, the SPX is approaching a trifecta of support:
1) The 20 day moving average is at 2793, so a possible Holy Grail buy signal could be on the table.
2) The bottom rail of a trend channel is also in the same 2790 region
3) 2792.69 is a 50% retrace of the crash.
As you can see, an important inflection point is on the table on a backtest of this 50% retracement region.
Sustained breakage below this level suggests another leg down may be in play.
99.999% of traders have never even seen the Square of 9... let alone understand its potential.
Do you dare to be different?
Popular posts
99.999% of traders have never even seen the Square of 9... let alone understand its potential.
Do you dare to be different?