THE BOTTOM LINE
Investors were given a real time demonstration over the past several days of how rare diagonal triangles form, and then resolve in freely traded markets, as a small degree diagonal formed and went to completion, and was followed by a typical post “waterfall” like decline. This formation tipped us off to an opportunity to sell some portfolio laggards into strength, which we did. The post diagonal decline was met with strong bidding, which has driven the S&P-500 back to new all-time highs.
Now the stock market has multiple options, which may take some time to sort out. One of these options is a potentially a large diagonal triangle under construction in the S&P-500 and NASDAQ, which at the moment is unconfirmed by our SAMMY indicator. We have assigned a 20% probability to the notion that a large diagonal triangle may be under construction in the S&P-500, NASDAQ or both. However, should a diagonal go to completion in either the S&P-500, NASDAQ or both, then it would be a big diagnostic gift, so it is definitely worth the effort to monitor this potential carefully.
The stock market has touched new all-time highs, which creates options for it likely requiring some time to sort out. The counter-trend rally in the bond market appears to have ended, which suggests the larger trend lower in price may be resuming. If the bonds accelerate lower, which means rising rates, then the bond market may select the optional path available for stocks. In any case the summer and fall are shaping up as an interesting time for the stock market.
A Textbook Demonstration
Over the last several days the stock market put on a textbook demonstration of how diagonal triangles, or rising wedges, form and then resolve themselves. Our last couple of updates discussed the possibility that a diagonal triangle, or rising wedge, may be forming in the S&P-500 eMini futures contract. We originally suspected a large diagonal was under construction, but as the development progressed the notion of a large wedge began to run into difficulty. However, characteristics of a triangle, or diagonal triangle, persisted like overlapping price, and tepid to low volume. Screenshot-243 shows how the formation did eventually go to completion, but just at a smaller degree than originally anticipated.
The diagonal triangle is drawn in on Screenshot-243 in yellow, and investors will notice that once the diagonal was complete it was followed by the characteristic “waterfall” like decline back to the beginning of the formation, and in this case a bit below. Diagonals appear only as “the last movement in a sequence”, and this often also signals a change in trend. However, in the current small degree case the completion of the “waterfall” like decline was met by strong bidding consistent with the persistently strong bid under the market in recent months. The bidders then proceeded to drive the price of the S&P-500 right back to new all-time highs. However, so far the Dow has failed to attain new all-time highs, which for the time being is a non-confirmation of the new high in the S&P-500.
So, we diagnosed the situation correctly, used it to cash out some laggard positions, and held our other holdings, which are now benefitting from the new all-time highs in the S&P-500. The big picture remains positive in terms of demand over supply, but shorter term there remain some issues to be resolved. The popular stock indexes have options at the moment, and it may take a while for the stock market to sort out what it will do next. And, some of those options may soon be taken away by the bond market, where a counter-trend rally in the price of the bonds may be beginning to fade, or has ended.
If the counter-trend rally in the bonds is over, or is nearly over, then interest rates are poised to begin rising again. If rates begin to rise sharply, then they will likely cast a shadow on the ability of stocks to rally strongly, and continuously higher. Translated this suggests one of the leading options for stocks may be a ragged range with an upward bias. At the least the stock market is likely to be a very interesting venue for the balance of the summer and fall.
As an aside, now that clients and research customers have received a real time demonstration of the formation, and resolution of diagonal triangles, among the options for the S&P-500 and NASDAQ is a larger diagonal triangle may still be under construction. Unfortunately, the surge in strength in TATY and SAMMY this past week reduces the odds of the recent small diagonal triangle just being part of a much larger diagonal in the S&P-500 to something on the order of 20%. It is really too soon in development in the S&P-500 and NASDAQ to speculate, but if either index completed a diagonal, then it would be a big gift diagnostically.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-281 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week above the red zone at 147.
If the stock market’s post diagonal triangle decline was enough to reinvigorate demand in a bull trend, which has months to run, then investors would like to see TATY begin to oscillate with bottoms forming in the red zone, and tops near the blue zone at the 160 level. This would be typical TATY behavior during the strongest segments of bull trends. For example, please observe the “TATY Trend” chart above, which shows TATY forming bottoms in the red zone during the strong bull rally following the 2003 bear market low.
The price weakness during the post diagonal triangle “waterfall” like decline failed to push TATY even into the caution zone surrounding the 115-125 level. This confirmed the persistently strong bid supporting the market, which has driven stocks back to new all-time highs basis the S&P-500. As long as TATY sustains itself above the caution zone, then the odds will favor assaults on new all-time highs.
If TATY begins to develop enough strength to begin forming oscillating bottoms in, or near the red zone, and tops near the blue zone surrounding the 160 level, then the life of the bull trend will likely be extended and measured in months rather than days or weeks. This kind of condition would likely be measurable objective evidence confirming the opinions of numerous “experts”, and investment houses often stated that a great bull market remains in its early innings. And, given such measurable evidence of strength investors would likely need to consider a larger exposure to equities.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-244 in yellow with the S&P-500 overlaid in red and blue candle chart format. The long standing negative divergence dating to the February 2020 high (down sloping orange dashed line) remained in place, as the price touched new all-time highs. However, SAMMY has strengthened, and made a new high for its rally off the March 2020 low.
While there is some suggestion in the price, and tepid recent volumes, that a large diagonal triangle may be under construction in the S&P-500 and NASDAQ, the behavior of the SAMMY indicator is not encouraging in this regard, hence the assignment of only a 20% probability to such an outcome. If diagonals were under construction in the S&P-500 and NASDAQ, then one would expect to see SAMMY just marking time, or weakening as the diagonals approach their respective completion. So, the break to new post March 2020 rally highs for SAMMY would appear to suggest potential acceleration in the price higher, as opposed to an overlapping situation typical during the formation of diagonals. This may change, but for now SAMMY is not constructive for a diagonal triangle outcome.
Please be safe!
