Sentiment Flies On the Carcass Of Capitalism

“Up on Cripple Creek, she sends me

If I spring a leak, she mends me

I don’t have to speak, she defends me

A drunkard’s dream if I ever did see one.” – Up On Cripple Creek, The Band

“If endless (government) borrowing is a viable solution, why did we have any taxation in the first place?

Modern Monetary Theory is not a good idea. It’s not modern, it’s not monetary, and it isn’t much of a theory.” – Jeffrey Gundlach

“The unsuccessful investor is best friends with hope, and hope skips along life’s path hand in hand with greed when it comes to the market.

Once a trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But, hope, like its market cousins ignorance, greed and fear, distorts reason.” – Jesse Livermore

Monday morning’s May 4 report, “Why Monday is the Most Important Day Since the March 23 Low” explained our expectations as to why a big turn was on the table.

It was.

Despite Monday’s big down Breakaway Gap, the trifecta of support outlined in the piece held, perpetuating a 134 point SPX rally of nearly 5% into Friday’s high.

Apart from the aforesaid technical trifecta of support, the most important factor in my presumption why Monday set up to be the most important day since March 23 was that the 3 Day Chart was going to turn down (based on the overnight action in the futes) for the first time since the March 23 low.

As a daily SPX in the May 4 report shows, the SPX turned its 3 Day Chart up directly off the March 23 low by tracing out 3 consecutive higher daily highs.

It wasn’t until Monday, May 4 that 3 consecutive lower daily lows were satisfied, thereby turning the 3 Day Chart back up.

We went on to tell subscribers that the first time the 3 Day Chart turns back down after such a sharp rally, the normal expectation would be for, at the very least, a knee-jerk rally — regardless of whatever the prevailing, underlying Line of Least Resistance might be.

In other words even if the primary trend is down, the normal expectation the first time the 3 Day Chart turns down on the heels of this sharp rally would be to see a rally attempt.

The SPX put an exclamation point on the week by jumping 40 points on Friday in ‘celebration’ of the joblessness in an unprecedented display by Bad News Bulls.

So that is the question that is staring us in the face given Friday’s stunning rally shrugging off expectedly ugly jobs report: is it a knee-jerk rally after a turn down in the 3 Day Chart last Monday or something more sustainable?

The answer to the question should come within a week and possibly as early as today.

That is because the SPX 3 Day Chart is set to turn back up today on trade above Friday’s high.

Trade above Friday’s high will carve out 3 consecutive higher daily highs.

Given that the index closed at/near session highs on Friday, it seems a fait accompli that the 3 Day Chart will turn up.

If so, it will give us a lot of information.

That is because if the primary trend is down, a turn up in the 3 Day Chart should mark a high soon in terms of time and price.

Checking a weekly SPX also shows this to be a critical week.

This is because last week was the first turndown in the Weekly Swing Chart since advance off the March low.

That weekly turndown was constructive: it marked a low followed by a rally.

Now the SPX is set to turn its weeklies back up if we get trade over last week's high.

Additionally, further rally could see the index challenge the recovery high, the high from the reversal bar the week of 4/27.

That high was 2954.86.

IF the SPX can offset the 2954.86 reversal week high and sustain above it, there is a likelihood it will test the 3000 region in short order.

Subscribers know this 3000 region is very important region for 3 reasons:

1) It was the Breakout Pivot above July/September 2019 double top which started the last ditch rally in late October.

2) It is where a blaring alarm signaling the March crash occurred when the SPX closed back below 3000.

3) Most importantly, on a big picture basis is the historic significance of 3014.

From the 1982 bear market low of 102 SPX to the 2000 high of 1553 is a range of 1451 points.

Multiplying 1451 by a Fibonacci Phi (1.618) gives 2347.

Adding 2347 to the 667 bear market low gives 3014.

The geometry is proved by the fact that the big December 2018 crash low was 2326.58.

Basically a direct hit with our 2347 number.

The SPX broke through 3014 last October perpetuating a blow-off.

Breakage back below 3014 in March saw a crash.

The presumption is a backtest toward this region should be a bearish event… a kiss goodbye.

Additionally, notice on the above weekly SPX that the 20 and 50 week moving averages are pinching at 2994 — just below this key 3014 level.

If the SPX should run up to backtest its declining 20 week moving average, it will be in a weekly Holy Grail sell position.

The power of a weekly Holy Grail should not be underestimated.

Two such weekly Holy Grail sell signals were registered in the 4th quarter 2018 debacle… one on the week of November 5 and one on the week of December 3.

Both led to sharp downdrafts.

Time-wise, mid-May also sets up as a turning point.

Mid-May is 90 days/degrees from the February all-time high.

Mid-May also ties to the 55 day Gann Panic Window counting from the March 23 low.

There are a cluster of other patterns/cycle that we have written about in a special report for subscribers today that also point to May as a turning point, which, taken independently, suggest risk is rising, and when taken together warrant extreme caution.

Conclusion. There is a big difference between short term price action driven by sentiment and the longer term driven by the fundamental facts on the ground.

While markets are driven by sentiment, analyzing sentiment can be challenging.

This is because perceptions affect prices and prices affect perceptions

Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change.

Price follows expectations, and expectations follow price in a never ending loop.

What causes expectations to change? It could be a change in fundamentals or a change in prices.

Indeed, sometimes prices could be manipulated to change expectations, which in turn can fuel further price momentum in a self-reinforcing way.

This is part and parcel of George Soros' Principle of Reflexivity, where the market effectively goes into a loop of change based on how we look at it, and how we look at the change in turn affects the market.

Perceptions affect price and price affects perception.

“Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.” – George Soros

We traffic in a technical approach which, unlike fundamental analysis, is sensitive to shifts in sentiment.

“Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.” – George Soros

The big story in the past week was the shift in sentiment.

Looking at the crazy reaction to many earnings reports, one might conclude the market is mentally ill.

Last week bore witness to some of the most epic short squeezes I’ve ever seen resulting of 20 -30% daily moves.

Earning’s squeeze plays include:

W 134 to 188

TWLO 122 to 182

FTNT 111 to 137

BILL 73 to 98

IPHI 99 to 117

And UI from 160 to 192… which Hit & Run members were long ahead of earnings.

Underpinning the earnings action was our old friend AYX that dropped from 122 to 110 on Thursday after guiding lower only to fully recover to close the week at 130… so a 20 point, 20% Earnings Reversal in a matter of hours.

As my dad, a great tape reader, liked to tell me, “Stocks don’t move, they are moved.”

Be that as it may, it remains a great two-sided tape with cash flow opportunities on the short side.

For example, on Friday I flagged SGEN on the Hit & Run private Twitter feed as a short just north of 161.

It dropped quickly to 153 before rebounding to 158.

I also flagged the ‘square-out’ spike in BILL at 98, which was followed by an intraday move on Friday to 82 in an hour.

Be that as it may, sentiment has shifted from market participants getting scared on each 1% plus downdraft to chomping at the bit buying each and every dip.

Whether this shift in sentiment underscores a constructive tape or is a sign that we are close to capitulation, I think the answer may be seen this week.

Underscoring the shift in sentiment is a the following chart tweeted by technician Helene Meisler on Saturday along with the comment “tell me again how everyone is bearish.”

Strategy. The SPX 200 week moving average beckons just below the key 3000 region.

The short-term Line of Least Resistance points the way higher.

Trade above Friday’s high will turn the 3 Day Chart up on a challenge of the April 29 2954.86 recovery high.

If the SPX eclipses that high and quickly knifes back below it, whether or not 3000 and the 200 day moving average have been kissed, defense is warranted.