The Bears vs. the Soup Nazi

“I have squandered my resistance
For a pocketful of mumbles
Such are promises
All lies and jest
Still a man hears what he wants to hear and disregards the rest.”
–The Boxer, Simon & Garfunkel

Stocks rose sharply on Friday as the market followed through from Thursday’s upside reversal from the SPX 200 day.

Thursday’s LROD (Lighting Rod — Large Range Outside Up Day) at the 200 day attracted buyers whereas a similar LROD at the SPX 50 day line on February 23 failed to do so.

What was the difference? Pattern. As offered on the Hit and Run Private Twitter Feed, Thursday’s turnaround had the benefit of my Soup Nazi buy setup.

Allow me to explain.

A Soup Nazi buy signal is a new 20 day low with a knife back up through the low of at least 4 sessions prior within the 20 day lookback. The purpose of the 4 day interval  is to guard against continuation (in this case downside). The reverse criteria sets up a Soup Nazi sell signal.

The idea stems from those systematic sellers of new 20 day lows (or buyers of new 20 day highs) but there is no follow thru — “No soup for you”.

For the moment, the 200 day did what the 50 day promised but failed to deliver.

The bulls hope expands  now based on the premise that we have seen a successful test of the 200 day moving average that will carry the SPX much higher. Their hope is imbued with a backtest of the breakout point in January of the Bear Trend Line since the January 2022 all-time high.

A daily SPX below shows 1) breakout of the trend line from the all-time highs and a subsequent back text of the breakout (B & B signal – Breakout & Backtest) in tandem with Wednesday/Thursday’s  test of the 200 day moving average.

This is really the first test of the 200 day moving average coming from the topside since late January 2022.

Bearishly that late January “test” came directly off the January 4 all-time high and elicited an Up Down Up Sequence or A B C pattern before the Bear announced with authority in early April that he was in charge.

In other words, there were two upside attempts to reclaim the 200 day, one in February 2022 and one in late March 2022 before the SPX was down for the count: the Second Mouse Got the Cheese For the Bears.

Below shows a study of the price action at the 200 day moving average since the Bear Market started in January 2022.

Let’s walk through the story the SPX 200 day moving average tells over the last 14 months.

The SPX knifes below its 200 day ma right off the all-time high in keeping with my forecast made in October 2021 that “the market would get hit hard starting in January 2022 kicking off a vicious bear market.” The quick drop below the 200 day from an all-time high is unusual and a potential Sign of the Bear. The normal expectation when the 200 day is tested/undercut for the first time in a while is to stage a rally. It did.

The rally was short-lived and the SPX plunged back below the 200 day once again but the writing is on the wall now.

The SPX reclaims the 200 day moving average once again in March but when this second attempt to reclaim the 200 day moving average falters, the index sinks below the ice.

It’s like someone falling through thin ice in the middle of a lake: they try to lift themselves out once but do not have the energy. They put everything they have into a second attempt but when they can’t climb out they fall back into the brink and sink. The Ice Man Cometh.

This is the picture following the March 29 peak that defined the Bear was in charge.

A rally off the June low hit its head on a picture-perfect kiss of the overhead ice at the 200 day moving average.

The normal expectation would be new lows and Mr. Bear did not disappoint with a drop to a text book October low… October being infamous for lows.

The rally off the October low ran up to the 200 day and saw the SPX try twice to hoist itself back above its 200 day. It faltered once again but what looked like a Bear Flag in December morphed into January strength that saw the index reclaim its 200 day for the longest stretch since the Bear Market started.

No small feat.

That said, job number one of Mr. Market is to deceive the most market participants as possible at the most critical time. Is a Bull Trap on the table?

As of last week the SPX has tested its 20 day moving average from above and held — for the moment.

It is easy to construe a bullish argument and that would be viable in a market in transition or in a primary bull market. It may be a market in transition but it is not a primary bull market…certainly not at this juncture.

In sum the SPX carved out the longest stretch above its 200 day in January since the Bear Market started.

Now as of last week we have the makings of a successful test of the 200 day moving average.

Is the coast clear? Are we out of the woods?

Is the market ready to march to new all-time highs?

While the market can do anything, the structure of the market as I see it presents the opposite case.

The T Rex in the bull ointment is that there is a strong likelihood that October completed an intermediate wave 1 down in the Bear.

I think the subsequent price structure is best counted as an A B C corrective wave 2 intermediate wave rally.

If that is correct, the leg down from the February 2 high is a minor wave 1 of Wave 3 down.

That suggests when the rally that started Thursday culminates the market will begin a dramatic decline.

Here are the two scenarios I see to kick this off.

On Sunday night as I write, the futures have pushed higher suggesting the 3 Day Chart on the SPX will turn up on Monday morning.

This occurs when you get 3 consecutive higher daily highs when the 3 Day Chart is pointing down.

If the Bear has the market firmly in its grip, then a turn up of the 3 Day Chart should define a high soon in terms of time and price. In other words, a high could occur on Monday.

The alternative is we get a little A B C structure with a high soon, a decline that holds 4000-4013  for the b wave followed by a c wave rally.

A c wave rally, if it comes, should not see the SPX advance beyond 4150.

I explain why this is the case in a note to Hit and Run members today.

Be that as it may, it will be easy to tell if a pernicious wave 3 decline is in progress:

1)      We will get breakage back below the 200 day moving average that sticks.

2)      The SPX will violate the Maginot Trend Line from the January 2022 high shown in the first chart of the SPX above.

3)      We will get breakage below the “close only” trend line from October 2022.

If this trifecta of technicals plays out, the recent FOMO will see mis-footed players rushing to the exits.

Fast moves come from false moves and if this trio of breakage occurs my expectation is accelerated momentum to the downside.

What could cause such an about face?

The market doesn’t “need” a catalyst: my motto is the news breaks with the cycles, not the other way around. However, my cycle work shows war cycles could be the culprit.

For example, the October 1987 crash was 40% over two months.

Three years later the modern age of terrorism started with the Gulf War in 1990.

The February-March 2020 Covid Crash is on the same cycle as the 1987 crash.

It was 38% in two months.

Here we are 3 years after the March 2020 crash low.

This week, Hit and Run will take aim and walk through the gathering clouds of war cycles that are due to exert their influence over the next two years.  They may not, but there is a convergence of cycles that was present at the Revolutionary War, the Civil War and the U.S. entry to WW2. Combined with natural market cycles, the synergy makes tail risk immense.