The First Mouse Gets The Squeeze…
Six years after the bad monetary policy following the pop of the 2000 Bubble we had a crisis.
Ten years after the bad monetary policy following the Great Financial Crisis we’re in another crisis.
For ten years leading up to 2022, the Fed was trying to create inflation.
They finally got their wish. And the ten years of bad policy that finally opened the door to inflation isn’t going to see that inflation back off easily.
They got what they asked for and way more and now they’re trying to choke it off.
In piling on, there is a strong likelihood they will exacerbate things.
Now we’re locked into a game of chicken with the markets about Higher For Longer.
Is Higher For Longer the new “I’m not even thinking about thinking about raising rates”?
The shards of disconnect resulting from the 21st centuries Booms and Busts perpetuated a stupid market.
As a friend and fellow trader says, the market walked right into the Covid crisis, just like it walked into the crisis that started in late 2021. Like walking into a 2 X 4.
Mark Twain said never argue with a stupid person, it will drag you down to their level and beat you with experience.
Between the disconnect courtesy of the Fed and the trading reflexivity perpetuated by Algomatics and Zero Days To Expiration options, the market is crazy.
The corollary to Twain’s comment about stupidity is never argue with a crazy person because others will have trouble telling you apart.
My point is the market walked right into Powell’s hawkish testimony on Tuesday.
What did The Market expect Powell to say?
To wit, the SPX turned up its 3 Day Chart and as anticipated, it would define a high soon in terms of both time and price if the market were bearish.
Tuesday’s ugly reversal immediately on the heels of the turn up of the 3 Day Chart are the Sign of the Bear.
1) The 3 Day Chart turned up on Monday and reversed after a Pinocchio of its 20 day moving average.
2) Tuesday saw immediate follow downside follow through.
The Hit and Run Private Twitter Feed offered that below 4040 opened the door lower and to get defensive on breakage below the 4013 “square-out” and especially below 4000.
3) The SPX followed through from Monday’s Holy Grail (backtest of 20 day ma)/ Lizard sell signal (10 day Toping Tail) with conviction. In so doing it triggered a Jump the Creek sell by offsetting last Friday’s upside gap.
4) The index also closed back below its 50 day moving average.
As noted in Monday’s Hit and Run Report, the elusive Wave 3 of 3 to the downside may be on deck.
There were two alternatives to its onset:
1) Either Monday’s high represented the top of countertrend wave 2 of Wave 3 down
2) or alternatively we get an A B C with one more good high above Monday’s high.
Based on the angle of attack on Tuesday I wouldn’t hold my breath for a rally above Monday’s high.
Last-ditch support for the SPX is a closing-only trend line from October shown last week.
Today that line is at 3970. Just below is the 200 day moving average at 3840.
The SPX has never closed below close-only trend line. It has not closed below its 200 day moving average on what the bulls view as a normal test following January’s Breakaway Momentum.
Last Thursday the SPX nominally undercut its 200 day ma and the aforesaid close-only trend line.
However, if we should violate and close below both on this drive lower, the second mouse will get the cheese for the bears.
In sum, last week's decline stopped cold at a test of the SPX 200 day moving average. The ensuing rally was stopped cold at the SPX declining 20 day moving average on Monday.
I don’t call it the Holy Grail for nothing.
Tuesday’s drop stopped cold at the high of the low bar day… last Thursday.
Trade below Tuesday’s low puts the SPX in a theoretical Plus One/Minus Two buy position.
This is because the 3 Day Chart is pointing up (Plus One) and a lower daily low today satisfies the Minus One part of my Swing Method.
I say theoretical because given the mapping structure noted above, a Wave 3 plunge could be on deck.
However, if one more good high (a C Wave to this possible A up, B down from last week) is on the table,
Then it should emanate from this Plus One/Minus Two buy setup — a somewhat lower low today.