What’s Next? How to Determine the Trend

“A star lit up like a cigar

Strung out like a guitar

Maybe you could educate my mind

Explain all these controls

I can’t sing but I’ve got soul

The goal is elevation.” – Elevation, U2

“It’s critical for the crocodile to understand it’s prey and to know where to look for it and remain calm and patient until it arrives. As traders, we have to know what our trading edge looks like and where to look for it and then control ourselves enough to not over-trade before it arrives.” – Nial Fuller

“We have a possible projection window of 2793 to 2896. It will be important to observe the behavior as the SPX turns its 3 Week Chart up today. If the index sustains the lion’s share of its gains today, it is constructive behavior suggesting the projection window may be seen… Those short of the market expecting another rollover from Friday’s distribution day are having a come to Jesus moment: the SPX is gapping above its 20 day moving average and in so doing is clearing a declining trendline from the March 4 high of 3120. It is notable that a gap BELOW the 20 day moving average kick-started the crash on February 24.”

We wrote the above in Monday morning’s report.

The SPX in fact did turn its 3 Week Chart up by tracing out 3 consecutive higher weekly highs.

The ensuing behavior was constructive for the near term as the SPX tacked on further gains after clearing last week's 2641.29 high.

It extended to as high as 2676.85 before setting at 2663.68.

Last week I said that from my perch, the 20 day moving average is more important than the 50 day moving average as there are approximately 20 trading days in a month and the 20 day m.a. smooths one month’s price action.

I call the 20 day the Holy Grail as it does a superb job of identifying long entries on pullbacks to the rising 20 day moving average.

Likewise, it does a superb job of identifying short entries on snapbacks to the declining 20 day m.a.

This is why members took a long in TZA prior to the close last Tuesday, March 31, as the SPX tailed off from its first test of its declining 20 day moving average.

Our entry was 62.10. We locked in a gain of 6.15 or 10% overnight.

Now, we have a decisive gap above the 20 day moving average in what looks like a mirror image of the gap below the 20 day that coincided with March’s waterfall decline.

We have a Grail Fail on the table. As long as the index can maintain above Monday’s gap, it can stretch higher.

Offsetting Monday’s gap will suggest a test/undercut of the March 23 SPX low at 2192.

Monday’s turnup of the SPX 3 Week Chart is a significant event and indicates the market is an inflection point.

Let’s take a look at the recent history of turns in the 3 Week Chart.

The 3 Week Chart turns up with 3 consecutive higher weekly highs.

Likewise, it turns down with 3 consecutive lower weekly lows.

The 3 Week Chart does a great job of defining the intermediate term trend.

However, it is critical to combine its message with that of the 3 Day Chart because big steps begin with little steps.

The 3 Day Chart does a great job of defining the short-term trend.

For example, the 3 Day Chart turned down directly off the February 19 all-time high on a gap. It went a long way to validating our call that the Crash of 2020 was on.

But this discussion is about the 3 Week Chart.

How important is the 3 Week Chart? The 3 Week Chart turned down on March 23. The day of the low.

It stopped the quickest decline to a 10%, 20% and 30% decline in history dead in its tracks.

There is a reason why 3 weeks is an important measure of time, but that is not what this is about – that is for another day.

Prior to the March 23 turndown of the 3 Week Chart, the last time it turned down was on December 17, 2018.

The SPX accelerated 230 points lower in 6 days, putting in a bottom THE NEXT WEEK at 2346 that would mark a low prior to a 1000 plus point rally in just over a year.

How important is the 3 Week Chart?

Prior to the December 2018 turndown in the 3 Week Chart, you have to go back to August 21, 2017 to find an instance where the 3 Week Chart turned down.

That turndown into the week of 8/21/17 defined an immediate low at 2417, which led to a blow-off 450 point rally in 5 months into late January 2018.

Despite the Feb 2018 crash, and throughout most all of 2018, the SPX 3 Week Chart remained pointing up.

The fact that it remained pointing up during the February 2018 flash crash indicated new highs were on the table.

They were.

Let’s step back and review.

The SPX turned its 3 Week Chart back up on the week of 8/28/17 and it remained pointing up until mid-December 2018.

A period of 16 months.

The 3 Week Chart turned back up immediately after the December 2018 low on the week of January 14, 2019.

It remained pointing up until the week of March 23, 2020.

A period of 14 months.

As we know, yesterday the 3 Week Chart turned back up again.

The bull case is that the market continues higher as it did in September 2017 and in January 2019.

The bear case is that yesterday’s turn up of the 3 Week Chart finds a high relatively soon in terms of price and time.

When the market is in a downtrend, I want to sell it as it tries to stand on its tiptoes.

When the market is in an uptrend, I want to buy it as it goes into a crouch.

The 3 Day and 3 Week Charts do an excellent job of pinpointing where to pull the trigger from these ‘tiptoe’ and ‘crouch’ positions.

So the complexion of the next pullback will give a lot of information as to the line of least resistance.

Checking the above weekly SPX shows that the SPX is challenging the 2675 region that defined the high of the week where the index turned its 3 Week Chart back up in January 2019 (magenta line).

Mr. Market has a memory like an elephant, so it will be important to see how it behaves in this region.

So there is a window of resistance between this 2675 area and 2793 — which represents a 50% retrace of the entire decline.

Notably, 2793 ties roughly to the 2850 level, where the last-ditch blow-off rally started in October 2018.

Hypothetically, above 2793ish could see the SPX march toward 2900 to as high as 3000.

This would satisfy a Measured Move.

In other words, a push to 2900 would mirror the range of the first leg off the low added to last weeks low.

Conclusion. I get a lot of questions about ‘targets’. It is human nature to want to know where something projects.

However, in my experience, it is the behavior of how an item ACTS in time that tells more about trend and the line of least resistance than price.

What’s important in the big picture is to have a method to determine the trend and let the market play out that trend.

Let the market talk.

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way.

If you can’t determine the trend, you can’t know the Line Of Least Resistance.

If you can’t measure risk, you can’t manage risk. Period.

Strategy. The powers that be have poured trillions to fight the virus fire. I can’t help but imagine them orchestrating an attack on the bears who have raided the market on so many Mondays over the last month. Monday certainly gave the bears something to think about. It remains to be seen if they just poured more gas on the market bonfire burning the shorts up in one fell swoop.