On Wednesday, the TREND of the market got into sync.
Allow me to explain.
In the first half of the day, the NAZ was deep crimson and the SPX slightly red while the DJIA was up around 200 points. IWM was slightly positive.
After the Fed minutes hit, everything accelerated to the downside with the DJIA leaving a Key Reversal Day from an ATH.
Tuesday was the tipoff to Wednesday’s massacre. The FOF front run trade — Friends of the Fed in the loop.
Be that as it may, apparently the market was surprised that the Fed is serious about raising rates.
As we offered in a report recently, Whatever Happened to Don't Fight the Fed, the Fed warned about excess speculation several times throughout 1929. When the market didn’t listen, the Fed hiked rates.
The likelihood is that when the market finally dropped, they were not going to consider loosening for fear of starting another bubble.
With buy the dip the mantra for the last 13 years — perpetuated by Fed largesse — and Powell in his legacy second term, I don’t think we’re going to see a Powell Pivot unless and until the market is meaningfully lower.
The Fed is afraid of the market again (as in 1929) and the market — as shown yesterday — is afraid of the Fed.
The Technicals: if the SPX ends the week at/near or below current levels, we’ll have a Key Reversal on the weeklies.
Down 93 points on the session, the SPX came to rest on the key 4700 line.
4700-4710 is the triple top breakout pivot, below which mirrors the false Rule of 4 Breakout on IWM in early November.
That breakout lasted all of 1 week and when it caved below the pivot, it dropped from 233 to 209 — leaving an outside down MONTH in its wake before a bounce played out.
Fast moves come from false moves. We should not be surprised if the SPX were to show a similar dramatic drop.
If the SPX were to leave an outside down month in January (echoing what IWM did following its false breakout), it would have to trade below the December 4495 low, obviously.
Trade in January below the December low triggers the January Indicator, which has a good record of calling for a down year.
An early tell on this indicator is the January 5 Day Rule.
This occurs if the first 5 days of January sees trade below the close of December 31.
The SPX closed at 4766.18 on Dec 31.
There is a strong likelihood the 1st five trading days will see a close below 4766.18.
The Maginot Line for the SPX is the 4620 region.
A trendline connecting the October and December lows ties to 4600.
As well, a trendline connecting the October 2020 low (that’s 15 months ago and the low of the first correction after the run up off the March 2020 crash low) with the October 2021 low also comes in at the 2620 region.
The take away is that breakage below 4620 opens the door to a push below the December 4495 low.
It is interesting that on my Square of 9 Time & Price Calculator (pictured below), 360 degrees down from the SPX ATH of 4808 gives 4533. It would only take a little slippage to see the SPX fully satisfy a drop below the December low here in January.
180 degrees down from 4808 is 4669.
Breakage below 4669 indicates a drop to the 4500 region is likely on the table.
As you recall, we flagged 479-480 SPY as an important square-out and the SPY is sporting a Key Reversal Week if it goes out like this tomorrow — so caution is warranted as to a waterfall decline in January in keeping with my call that “the market would get hit hard in January.”
To recap, 479-480 is 180 degrees straight across and opposite the key November 22 primary high—a Key Reversal Day.
One of the most important trading rules is to see what you believe… until proven otherwise.
The indices took so long to react to the carnage in high flying/high multiple growth glamours that it is easy to conclude that rotation into other names a la IBM and banks and cyclicals will support the market until the techs get fully flushed out and then they will be buys and join in and the bull market will continue merrily higher.
However, yesterday was a clarion call that there is no place to run and no place to hide when Mr. Bear comes calling.
In other words, there are no safe havens when the bear comes out of hibernation.
MSFT warned with the Test of a Test pattern flagged in this space a few days ago and has become a source of funds.
Above I mention the November 22 primary high.
Over the last month I have warned of the Gann Panic Cycle, which hits 49-55 days following an important peak.
The crashes in both 1929 and 1987 hit hard around the 49th day from the ATH, with the crash climax around 55 to 56 days after the top.
The final pivot high prior to the rollover comes around the 40th day in this Gann Panic Cycle.
December 31/January 1 is 40 calendar days from November 22.
The panic window is open until around mid-January.
If history is any guide (and it is), there is a strong setup for a drop to 4500ish by mid-January.