The Hunt For Red October… Again?

“The band begins at ten to six

When Mr. K. performs his tricks without a sound.” – Being for the Benefit of Mr. Kite, The Beatles

“Cycles in business and the stock and commodity markets have always repeated and always will.

Nature’s laws are unchangeable and no man or set of men can change them.” – W.D. Gann

“The Future is but a repetition of the Past.” – W.D. Gann

Word that President Trump has contracted the coronavirus sent the market reeling before Friday’s open — initially.

One might have expected the stock market to decline sharply on a day when the leader of the free world has been stricken by a disease that has killed more than a million people; however, the averages struck an Opening Spike low and rallied sharply into the open gap.

Despite a late day swoon, the averages held the morning lows (albeit after a mid-day test).

Maybe the Algomatics aren’t familiar with the word “contracted” and they think Trump put a contract out on Covid like the Corleone’s?

And, if you haven’t heard, no meaningful declines in the stock market will occur in the next 3 years due to an announced accommodative Fed interest-rate policy.

It’s nice to know they have a crystal ball because history shows the Fed has been on the wrong side of history most of the time since their inception on December 24, 1913.

Be that as it may, the Buy the Dip crowd has been trumped by the Buy the Panic people.

The presumption is Buy the Hysteria is on the table if the Hunt for Red October shows up.

FSLY exemplifies the BTD mentality Friday morning.

FSLY (one of our go to long and short trading vehicles at Hit & Run) opened down 3 to 95 and ripped to 102 within 30 mins.

It was a Friday, so maybe it was part of an Option Expiration Sweepstakes play.

Pin Action.

Pin the Tail on the Option Expiration Donkey.

FSLY was not alone in the option expiration shenanigans.

For example, CRWD saw a similar pattern. It opened down 3 to 139.73, setting an Opening Spike Low of its own and within 30 minutes tagged 145.50.

That said, these and other liquid glamours gave up the ghost closing down on the day.

CRWD closed down apx 3 points near its open.

As well, when the dust settled, FSLY closed in the red, shedding 2.50 by the bell.

Leaders SHOP and TSLA tailed off as well.

Other glamours such as OKTA and TWLO held up well, giving a good account of themselves into the close.

Many market participants wonder why October is infamous for panicky declines.

Well, W.D. Gann wrote that 7 is the fatal number.

He said that the natural beginning of the year was the spring equinox on March 21.

7 months from March 21 is October 21.

October 19 was Black Friday in 1987.

October 24 and 29 were the big crash days in 1929.

In both instances, cycles began to exert their downside influence decisively on the 7th week from high.

In both those years, the high was late August/early September.

Ditto 2020.

The implication is the market could see indiscriminate selling this fall.

Are there any similarities between 1987 and 1920 and 2020?

Each of these years saw blow-off moves start from May lows into the end of August/early September.

The following weekly SPX shows that this year in particular, the spike into a September 2 top resulted in a large range weekly reversal.

There are several important pieces of information that can be gleaned by the above weeklies.

1) The SPX turned its 3 Week Chart down on the week of 9/14 for the first time since the rally off the March low. Importantly, it did so directly off the high, an indication that the 3588 price high was a significant “vibration.”

Allow me to explain. The intraday high was 3588.

On the Square of 9 Wheel, 3588 is square February 19, the pre-crash high in February.

Blue is 3588
Purple is Feb 19

So there is an harmonic relationship between the September high and the February high.

As well, the closing all-time SPX high to date was 3581.

On the Square of 9 Wheel, 3581 is square September 2, the high, for a Time/Price square-out.

Green is 3581
Red is September 2

2) The SPX declined 540 degrees to the low 3200 region off the high. I’m not going to get into it here again, but 540 degrees is a significant measurement in time and price. It is straight across and opposite from the ATH.

3) As the above weekly SPX shows, the index bounced from the low 3200 region which coincided with its first test of its rising 20 week moving average. This is a weekly Holy Grail buy setup. This was the first weekly Holy Grail signal since the rally off the March low. Additionally, the low was stuck on September 24, which is 180 degrees straight across and opposite the March 23 low for Time square-out. The normal expectation was for a bounce from the 3200 region as alerted to subscribers at that time.

What is the position of the SPX now?

The bounce off the low propelled the index to a 50% retrace of the entire drop which saw a turn up of the weeklies. In other words, the SPX turned its Weekly Swing Chart up.

When the market is in a weak position, a turn up of the weeklies will define a high soon in terms of time and price.

Last week the SPX tailed off, following a turn up of its weeklies.

Be that as it may, another higher weekly high could follow which could be pivotal within the context of a secondary rally phase.

The rally off the 3200 region saw the SPX reclaim its 50 day line in tandem with its 50% retrace; however, on the important Friday weekly closing basis, the index closed back below its 50 day m.a.

Given the action in the futures overnight, it looks like the 50 day line is going to be tested again to open the week.

In sum, last week's 3397 high ties closely to the February pre-crash high of 3393. Mr. Market has a memory.

It will be important to see if it remembers other Red Octobers.

If so, it is carving out a secondary high.

Last Monday, the SPX gapped open, sharply closing the session at 3351.

For all the noise, when it was all said and done, it closed the week at 3348.

As subscribers know, 3353 is an important “Tunnel' level (as in Gann’s Tunnel Thru the Air novel).

The take away is that sustained trade below 3353 that in turn sees a push back through the open gap at 3298 warrants caution.

Downside follow through below the 3200 region, the lows of 2 weeks ago, in concert with breakage below the 20 week moving average opens the door for a Red October.

It is important to remember that the market is not a fine Swiss watch.

As Mark Twain said, history may not repeat exactly, but it often rhymes.

If a waterfall decline does not play out in October, it does not mean November is out of the woods.

“And of course Henry the Horse dances the waltz.” – The Beatles