Morning Notes – 5/18/2022

Good Morning:

• If you were a subscriber this morning, it would be a good morning as we were in cash yesterday.
• As I indicated on Monday, I am in the throws of the death of my mother, memorials, and funeral arrangements – so I have been distracted. But I am not sure I would have expected such a severe reversal yesterday.
• The rising wedge on the hourly charts I mentioned yesterday morning did call for some profit-taking – but not a complete retest.
• It was many years ago that I read all the books one would read before pursuing the dream of trading for a living. And the books definitely need improvement, which is why I am working on my own.
• Chief among my complaints in the existing literature is this: the books never discuss the principle that “When What Should Happen Doesn’t,” or WWSHD as we call it, is a setup in and of itself. I believe that I first heard the phrase from Peter Reznicek, who incidentally has one of the best trading websites around.
• What they don’t teach in the books is that if the particular setup fails, the failure in and of itself may be a signal that something in the opposite direction is afoot.
• Coming into yesterday’s session, I had several observations. I postured that the options market would be providing some Vanna tailwinds into Friday’s monthly expiration. There was a Head and Shoulders reversal pattern on the hourly charts. While I have seen steeper patterns, it was a sign that a “V” reversal may have been underway.
• What a “V” reversal means to a professional is that the low in place may not need to be retested. Normally, one would not plunge back into the market on a new 52-week low such as occurred in the market a week ago today on 5/12. Instead, you would wait a week to make sure the low is secure.
• But the low from last week did appear to be secure when a follow-through day was successfully presented on Tuesday to confirm the pattern. As you will recall, our swing trader subscribers scalped about 40 S&P 500 points before being stopped out on that day.
• The bottom line is that yesterday’s steep reversal was unexpected – at least I didn’t expect it.
• Yes, Walmart, Target, and now Cisco (after the bell yesterday) all gave dismal forward guidance in the past 48 hours. The stocks were decimated. But I don’t understand the surprise. Anyone with half a brain should have expected as much – but apparently the street was caught off-guard.
• We will never know if the current retest of last Thursday’s low was in the cards anyway, or is the result of the news. In any event, we have a retest today – exactly five trading days after the low – which is exactly when one would expect the retest to occur.
• Either the retest will be successful, and my best guess is that it will, or we will have a genuine “3” count crash leg underway.
• A crash is a low probability event, typically reserved for the September/October time frame, but anything is possible in a bubble. But the probabilities are low at this particular time of year and I don’t want to ignore the fact that the S&P 500 is already down 20% from its January peak.
• There typically is a recovery leg about now that would at least take us back up to the 21 or 50-day lines if past bear markets are any guide.