Critical Market Update

“I am having an affair with a random computer.” – 2000 Man, Rolling Stones

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, again and again, to lower the gross market rate of interest by means of credit expression. There is NO means of avoiding the final collapse of a boom brought about by such credit expansion.”

20 years ago, the SPX saw Buying Climax into March 24.

In 2020, we got a Selling Climax into March 23.

Late August 2000 marked a secondary high in 2000.

My expectation is that this August will also prove to be eventful.

The following NDX/SPX ratio underscores this 20 year cycle

Thursday was an eventful day. The AAPL of the bull’s eye blinked.

Friday’s report showed AAPL’s breakage below a trendline from the March low in tandem with a failure below its rising 20 day moving average.

The normal expectation is that the first Holy Grail signal (a test of the rising 20 day m.a.) acts as support.

However in this instance, because it had been 4 months since the 20 day had been tested and, as well, because it had been nearly 4 months since AAPL had flushed a rising trendline since early April, AAPL buckled, breaching its 20 day moving with authority implying downside follow through on Friday.

As offered in Friday morning’s report, breakage below 380 which represents 90 degrees down from AAPL’s 399-400 all-time high, targeted 361.

Notably, AAPL tagged 361 right off the get-go on Friday, slipping to as low as 356.58 before reversing with the high of the low bar on the 10 minute basis striking at 361.

In essence, AAPL carved out an Opening Spike Low at 361, walking back up 371.62 in just over an hour.

Got geometry? How valuable is this key to the Principle of Squares which opened the door to a 10 point gain on the downside followed by a 10 point gain on the subsequent rebound — all within hours?

The following Square of 9 Chart below shows these geometric relationships.

Red is 400
Green is 380
Blue is 361

There are three factors leading to an expectation that a test of the 361 region by AAPL on Friday would find support and in turn stabilize the market — for the moment at least.

1) 90 degrees down from high is 380. 180 degrees down is 361.

2) Following a big sell day such as Thursday, the normal expectation is that big down opening on Friday would probably set an Opening Spike Low in the first half hour/hour. The hot-money, overnight shorts cover taking the Gift Horse Trade while the buy the dip bulls step in—after all, that has been the correct posture for 4 months in AAPL.

3) As well, AAPL turned its 3 Day Chart down on Friday morning—albeit with an expansion in range. The important 3 Day Chart turns down with 3 consecutive lower daily lows (not closing lows). The question of course is whether the expansion in range is distribution or climatic in the short term.

Since the March low, AAPL has only turned its 3 Day Chart down 4 times prior to Friday.

Those dates are April 21, May 15, June 15, and June 26.

Each of those instances defined a low in AAPL and the NAZ.

The following NAZ shows it also turned down its 3 Day Chart on Friday — for only the 4th time since the March low.

The NAZ, like AAPL registered a close below its 20 day m.a. on the Friday weekly closing basis last week.

In fact, Friday was only the 2nd time since the NAZ reclaimed its 20 day line on April 6, that the index closed below its 20 day.

The last time it did so was on June 26 — also a Friday and also a turn down on the NAZ 3 Day Chart.

The next session, June 29, saw a sharp rally start that carried the NAZ to new all-time highs.

That runaway rallied hit a brick wall registering a large range Key Reversal Day on July 13.

The July 14 signal bar reversal day was tested on Tuesday, July 21 with a gap up to record highs that Pinocchioed the July 14 high and reversed.

Importantly, July 21 looks like a test failure of the July 14 reversal.

In other words, as flagged in this space last week, the July 14 NAZ Key Reversal Day has been followed up with dual sell signals on Turnaround Tuesday, July 21 — a Gilligan sell signal and a Soup Nazi sell signal.

These are two strategies I created that were in the two Hit & Run books from the late 1990s. They do a good job of identifying exhaustion… which sometimes (not always) indicates major changes in trend.

A Gilligan sell is a gap up to a new 60 day high with a close at/near session lows. The rules are reversed for a Gilligan’s Island buy.

A Soup Nazi (from the Seinfeld Show) is a new 20 day high with a reversal back below the prior swing high within that 20 day window with at least a 4 day interval between the two highs — to guard against continuations). The rules are reversed for a Soup Nazi buy signal.

There is a 6 trading day interval between the July 14 high and the July 21 high within a 20 day new high window.

So the criteria for a Soup Nazi is present.

Last week's downside follow through suggests Tuesday may have been a test failure of the July 14 high.

So the action early this week will be important as each time the NAZ 3 Day Chart has turned down throughout the advance since March it has defined a low and an immediate resumption of the rally.

Consequently, the Line Of Least Resistance is in jeopardy of turning down.

A failure to get impulsive upside action early this week will be another sign of a change in character in the market.

Sustained trade below Friday’s low opens the door to a backtest of the NAZ February high of 9838.

This ties to a test/undercut of the 50 day line.

There is a cluster of channels that could magnetize the NAZ to this region.

First there is a lower rail of a channel (red) on the one year cycle from the important June 3, 2019 higher low.

Then there is the lower rail of a channel from the March 2020 low (magenta).

The bottom of both of these channels converge with horizontal support from the February peak by mid-August where there are many cycles nesting.

It looks like this cluster of channels will magnetize the NAZ lower with a test of the February high looming.

If prior resistance (the February highs) does not act as new support, it points the way lower.

For its part, AAPL tailed up after turning its 3 Day Chart down on Friday on an approach to its 50 day line.

It may trace out a backtest of its now overhead 20 day moving average early this week.

If so, its subsequent behavior will be a big tell.

Checking a weekly AAPL for the year shows last week’s range was virtually a mirror image of the large range reversal at the end of March.

AAPL turned its Weekly Swing Chart down with authority last week.

Notice that the only other weekly turndown since March was on the week of 4/20/20 when AAPL traded below the prior weeks low by just 40 cents before rallying decisively.

There is a conspicuous distinction between the late April weekly turndown and that of last week.

Downside follow through warrants caution.

As well it is worth noting that AAPL left a signal bar reversal on the week of January 27 and did not immediately drop. It backed and filled for 3 weeks.

As traders we looking for immediate gratification from signals — Lickety-Split, like a watermelon thrown off the Empire State Building or conversely like a rocket off the launching pad — but those to have their “count-down” and are subject to Time.

The market does not exist to accommodate our immediate gratification. This is just not always the way the market works.

Often an item puts time on the side before following through on a signal.

Once some players throw in the towel and walk away from a signal or are squeezed out, then often times the play pans out in earnest.

This is why I say, speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets us into trouble.

The most powerful thing you can do to transform your trading is to change the way you think about trading… i.e., don’t think, observe.

Be in the moment, experientially, not in the thesis.

Summary. Last week Hit & Run members took a long position in the QQQ August 255 puts.

The position was initiated at 6.22. On Friday’s whoosh lower we sold half at 9.78.

We took the position because QQQ is the tip of the tech spear and tech looked like it was on the ropes

As flagged last week there were several tech growth glamours that looked like they had carved out Head & Shoulders top formations.

Names include CRWD, ETSY, FSLY and AYX.

Each of these names tailed up on Thursday, so it will be important to see if they can cobble together some upside traction for more than two days, otherwise defense is on the field.

It must be said that a Breakaway Gap in February below the 20 and then 50 day m.a. perpetuated the March crash.

Downside follow through from here especially on a gap and breakage below the 50 day moving average points to the low 9000 region on the NAZ.

pos QQQ puts