THE BOTTOM LINE
The stock market continues to prove itself a master of disguise, with the S&P 500 teasing an ending diagonal triangle formation—until last week, when the pattern began to break down and morph into something yet to be identified. While the formation still holds in the NASDAQ, the S&P 500’s failure suggests the NASDAQ may follow suit. This aligns with the broader trend in recent years, where triangles and diagonals often fail to complete.
According to TATY, SAMMY, and STERLING indicators, the rally appears fatigued. If investors continue pushing prices higher, sustaining new all-time highs may prove difficult. Market tops remain one of the most challenging scenarios for analysts to diagnose, largely due to the slow fading of euphoria and the difficulty of objectively measuring its elusive nature.
A TEASE MASQUERADING AS A LAYUP
The stock market has once again proven itself a master of disguise and deception, particularly since the May 23 low. From that point, it appeared to be forming a rare and potentially significant pattern—an ending diagonal triangle (or rising wedge in classical charting terms). Unlike most technical patterns, triangles and diagonals have a strong statistical foundation. That’s why, aside from these formations, we typically disregard classical chart reading in favor of analyzing the Law of Supply and Demand, which we believe is the cornerstone of market behavior. Both our work and that of Lowry Research focus on this principle, and our risk-adjusted performance managing real client portfolios speaks to the value of this approach.
Unfortunately, as we’ve seen in recent years, the diagonal triangle failed to resolve as expected. Instead of concluding with a sharp reversal, the pattern has morphed into a muddled, overlapping formation—grinding sideways just beneath all-time highs on the S&P 500. This significantly lowers the odds of a swift, decisive decline. The NASDAQ, however, may still be forming a clean diagonal, offering a slim chance the original thesis plays out there. We cautioned that recent markets have a habit of teasing rather than rewarding classical pattern watchers—and that appears to be the case once again. C’est la vie.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week below the red zone at 137. TATY appears to be struggling to overcome resistance at the red zone surrounding the 140. If a new leg up in an ongoing bull market began at the April tariff low, then investors would have every reason to believe that TATY would be leading the price higher by soaring above the red zone and eventually forming bottoms in, or near the red zone and tops near, or above the blue zone surrounding the 160 level. The failure of TATY to sustain above the red zone should be of concern for the bulls and encouragement for the bears.
The negative divergence (down sloping magenta line) being painted out by TATY is also happening in the lower panel with the Premium/Discount indicator. This suggests that the strong hands may be distributing their holdings to the weak hands, which is essential for a topping process.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 eMini futures contract overlaid in red and green candle chart format. SAMMY continues to be the bear’s best friend by figuratively “screaming” that something has been wrong with the stampede to new all-time highs dating to last summer. The dashed red and magenta down sloping lines continue to be formidable resistance for SAMMY and this past week SAMMY fell back below both resistance lines, which should be a concern for the bulls and encouragement for the bears. Investors would expect SAMMY to be leading the price higher, if the April tariff low was the beginning of a new leg up in an ongoing bull market. However, instead SAMMY is exerting a gravity like force on the price attempting to restrain or retard the rally attempt in the price. We shall see if SAMMY wins the bull/bear tug-o-war, or once again the bulls drive the price to new all-time highs.
STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
STERLING is shown in Screenshot-192 in the upper panel with the S&P-500 eMini futures contract in the lower panel. STERLING is sporting a negative divergence (dashed down sloping magenta line) to the rallying price. These kinds of negative divergences tend to foreshadow bouts of price weakness, so STERLING is tending to confirm the yawning negative divergence being painted out by SAMMY. This implies that the price may touch new all-time highs but is likely to be so fatigued that the price may not be able to hold the new all-time highs. Alternatively, the rally may fail short of new all-time highs, so in either case holding new all-time highs implies rising volatility and perhaps some swift price movements capable of whipsawing traders and investors. As a former mentor of mine once said: “This ain’t no place for amateurs”!
