Shake-Out Or Correction?
They say the trend is your friend, but is the trend bending?
How can one determine the trend?
First you have to define trend.
Trend is different for every trader. It depends on the time frame they are trading.
Then you must know that there are trends running concurrently like a double helix.
There are many methods and strategies that market participants use to determine when a pullback is a buying opportunity or a pullback is something more than a pullback.
The 3 Day Chart and the 3 Week Chart are two of the best tools I know of to determine the near term trend and the intermediate trend.
The 3 Day Chart turns down anytime there are 3 consecutive lower daily lows OR a prior circled 3 Day low is violated (a prior swing low which marked a trough).
The 3 Day Chart turns up with 3 consecutive higher highs or on trade above a prior circled 3 Day Chart high.
The 3 Week Chart turns down anytime an item shows 3 consecutive lower weekly lows—or on trade below a prior circled 3 week circled high.
The 3 Week Chart turns up anytime an item shows 3 consecutive higher weekly highs —or a prior 3 week circled high is cleared.
Let’s take a look at an SPX daily from the last major swing low on August 21st.
The last time the 3 Week Chart turned down was on the week of August 21.
The index set a low at 2417 on an undercut of its 50 day line.
The last time the 3 Day Chart turned down was on November 15th.
Notice that there was roughly 90 days/degrees between the August low and the November low.
The natural 90/180/270 and 360 day/degree divisions of the year are integral to Gann analysis.
The November 15th turndown of the 3 Day Chart also was a test of the 50 day moving average.
Today the SPX is poised for a possible turndown of its 3 Day Chart if it trades below yesterday’s low.
This will trace out 3 consecutive lower daily lows.
Importantly, this is occurring as the index satisfies a 90 degree price pullback.
From last Friday’s record 2872 high, 90 degrees down is 2818.
Notice that despite the selling pressure of the last two days the SPX has held 2818 on a closing basis.
It slipped under 2818 yesterday to a low of 2813 but recovered to close at 2823.
Importantly, January 31, yesterday, is 90 degrees square the number 2813 on my Square of 9 Wheel.
So we have so to speak, a double square-out on the table:
The SPX has satisfied a 90 degree price pullback.
Yesterday was a possible time/price square-out with 2813 being 90 degrees square of January 31st.
It’s still a bull market so these square-outs must be respected.
That said the 3 Day Chart has not turned down yet.
It could do so today.
Trade below Wednesday’s low that that sets a low and turns up either today or Friday suggests a low of some degree.
However there are a few caveats that suggests this time is different that November.
First of all the index is dealing with a Break Away gap directly off an all time high.
It looks like a Gallows Hangman pattern.
This suggests last Friday’s rip was a Buying Climax…at least in the short run.
Additionally, the SPX is stretched well above its 50 day moving average—a conspicuous difference between the August and November lows.
The presumption is that if the SPX turns down its 3 Day Chart and it does not define a low, it’s going lower.
The indication is that if 2818 and 2813 fail to act as support, the SPX is headed lower.
The conclusion would be that we have a change in character and that rather than a shakeout, a more meaningful correction is playing out.
So let’s do the geometry.
A 180 degree decline from high is 2766.
360 degrees down is 2662.
This would be one full cycle in price down from the 2872 record high.
There is some good symmetry to the idea of a decline to around 2662.
It represents a 50% retrace of the last leg up (from the August low).
It marks a little burst of volatility in early December which was the mid-point of the rally.
2662 also ties to a test/undercut of the 50 day line.
Additionally, a decline that flushes the 50 day satisfies a test of a trendline connecting the August low and the November low.
The January low is 2682.36.
Trade by one tick below that level in February would also satisfy a turn down in the Monthly Swing Chart.
If that occurs, bull or bear, the strong likelihood would be for a continuation of the bull or a reaction higher even if a bear market is on the table.
The last time the Monthly Swing Chart turned down was in November 2016.
It’s stretched.
The probabilities are that it will turn down.
If it does not do so in February…180 degrees/days from the August low, it may do so in March on trade below whatever the February SPX low is…going into the NINTH anniversary of the March 2009 low.
Whenever it turns down, it will be a significant inflection point.
Be that as it may, the price action here going into the weekend will tell the tale as to whether we’re in just a short-term shakeout or a more meaningful correction is on the table.
Because 2 X the 455 point range of the leg up from August is the range of the 910 point bear market from Oct ’07 to March ’09, the symmetry suggests that the 2872 high (a square-out as January 26 is 180 degrees opposite 2872) may have marked the end of a significant Buying Climax—one which should at least see the deepest correction in the last 14 months.
Interestingly, 455 is opposite the date of March 6th…the low in 2009.
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Volatility and turbulence should characterize the market going into March.
Depending on the nature of a bonafide correction this quarter, a turn back up in the SPX projects potential to just over 3000 SPX.
However, it is the behavior of the wheels of time, the Weekly and Monthly Swing Charts that will tell if that’s going to play out.