The First Mouse Gets the Squeeze, the Second Mouse Gets the Cheese
- June 24, 2020
- / By Jeff Cooper
“What the wise man does in the beginning, the fool does in the end.” – Howard Marks
If you just listen to the news, you heard that the NAZ scored a record high on Tuesday and that for the first time since last December, the leading index, the NAZ, scored 8 consecutive higher closes on Tuesday.
Everything looks jolly. Right?
However that’s not the whole story.
It was a Turnaround Tuesday.
The following daily NAZ shows it left a signal reversal day on Tuesday.
It left a 10 day high Topping Tail, or what I call a Lizard sell signal.
In other words, the NAZ ran up after the open to strike a new 10 day high (in this case an all-time new high) and “tailed off” to close near the bottom of the day’s range near the open.
We created the above chart last night, noting that a gap down today that sticks could leave an Island Top.
Be that as it may, the NAZ had a Breakaway Gap from an all-time high on June 11, which after a 3 day pullback saw a rally phase which elicited Tuesday’s all-time new high.
That said, a knife now below the prior June 10 high opens the door to the possibility that the NAZ just installed a secondary high to June 10 primary high.
The pattern is reminiscent of that from January/February.
The NAZ topped on January 24 leaving a signal reversal bar, a Gilligan, followed by a Breakaway Gap.
A Gilligan is a strategy I created that, like the aforesaid Lizard, does a good job of identifying exhaustion after climax runs.
It must be said that many important tops or bottoms are signal reversal bars but not all signal reversal bars such as Lizards or Gilligans are tops (or bottoms as the case may be).
The one sacrosanct rule to determine whether a signal bar is meaningful is FOLLOW-THROUGH.
Follow-through is key.
Our cycle work on AAPL and the SPX (as you will see below) underpins the idea that June 23’s Turnaround Tuesday may be one for the books.
Again, the current pattern is similar to that of January/February before the deluge. In January the first break saw a successful test of the 20 day moving average that perpetuated a push to new record high. Then came a second Breakaway Gap.
The second gap saw authoritative breakage below the 20 day moving average.
The knife below the 20 day and the prior swing low from late January signaled the waterfall decline that followed.
Put succinctly, the first mouse got the squeeze, the second mouse got the cheese.
The first sell signal saw a squeeze higher while the second sell signal got the cheese.
This is often the way tops (and bottoms) are formed — with a primary high followed by a secondary high.
As in the one month time frame from late January to late February, in June the NAZ struck an all-time high on June 10 followed by a Breakaway Gap and a successful test of the 20 day moving average.
As in late January, following a Breakaway Gap again, a test of the rising 20 day moving average (Holy Grail buy setup) on June 12 led to a new all-time high.
Now, as in February, we are starring in the face the possibility of a Breakaway Gap today and a knife below a prior swing high — in this case the 10,086 high from June 10.
If the knife sticks, it opens the door to a test of the 20 day moving average currently residing at 9756.
If we get a Grail Fail, a failure below the 20 day moving average, it puts a Cascade setup on the table.
This is because just below the 20 day moving average is a 3 point trendline.
A break of a 3 point trendline is what I call a Rule of 4 Sell.
This is because you don’t get many quadruple tops or bottoms.
The 4th time through is usually the real deal.
It must be said that this possible Cascade setup is in the context of what may be a Wave 1 down into March and a corrective Wave 2 rally that is culminating here in June.
If so, we are on the cusp of a powerful Wave 3 decline — just in time for Davey Day Trader who thinks Warren Buffet is an idiot and that this game is easy.
All I will say is, only the humble survive in this game and if Warren Buffet is an idiot, we’ve all got a problem.
As odd as it may seem that a new all time high is consistent with a corrective wave, this is exactly what we got in 2019 following the 4th quarter waterfall decline into Christmas 2018.
The 2019 rally (into early this year) was followed by a crash just as the NAZ new high in late August 2018 was followed by a waterfall decline.
The NAZ new high is unconfirmed by the DJIA or SPX.
Unsustained new highs can be the most dangerous point for an unconfirmed rally as it can mark a Late Stage False Breakout (LSFB).
This is consistent with the notion that a Wave 3 decline may be on the table
The Maginot Line is the trifecta of technical around 9500.
1) The aforesaid 3 point trendline
2) The 20 day moving average.
3) The last 3 Day Chart low.
One of the tools I use to determine what Jesse Livermore calls The Line of Least Resistance is the 3 Day Chart.
The 3 Day Chart has only turned down twice in the advance off the March low… on May 14 and on June 15.
Both turndowns were tests of the 20 day moving average.
Breakage below the circled 3 Day Chart low now is a conspicuously bearish event.
W.D. Gann wrote that markets are harmonic and play out in the 90 degree divisions of the circle or cycle in time and price.
Underscoring this sell setup is that the market has rallied precisely 90 days/degrees from the March 23 low.
Notably from its major October 2, 2019 low, the NAZ blew-off just shy of a perfected 180 days/degrees, topping in late February.
Conclusion. Yesterday’s report walked through the Quarter-End Playbook at least one big fund often times employs that enhances their performance to the detriment of the competition.
The action of several leaders leaving reversal bars yesterday just a few days in front of quarter-end may be an indication that this play book is on the poker table.
If so, expect Air Pocketism in some of marquee names that shot the lights out this quarter.
The reversals yesterday in vertical names like FSLY, COUP, CDLX (which subscribers re-shorted), AYX, CRWD and SE, to mention a few, suggest a sell program in this quarters winners may be working.
FSLY has been one of the most vertical names this month.
FSLY was a recent IPO in May 2019. IPO’s are the heart and soul of speculative sentiment.
As such, they are a good barometer of risk on/risk off.
FSLY ripped from a low of 10 in March to 81 yesterday, an 8 bagger in the quarter.
As such, its behavior into the end of June may be very revealing as to the institutional gamesmanship into the end of June.
The following daily FSLY shows dual Gilligan/Lizard sell signals from Turnaround Tuesday.
Following Monday’s large range gainer, Tuesday’s Tail has the look of a near-term Buying Climax.
FSLY gapped open and extended on Tuesday, but the reversal back through the morning high saw it bleed into the close, setting it up for a possible Island Top today.
The point is, markets can turn on a dime, most traders cannot.