BEAR RALLY, SMALL OR LARGE?

THE BOTTOM LINE

The weight of the evidence is favorable for a weakening bear market rally to expire in the days ahead, possibly by early August or sooner. If this turns out to be the case, then the bear market price decline will resume upon the expiration of the rally, and possibly accelerate lower. If the less probable case is at work, then S&P-500 3636 was the terminus of an initial leg down in a new bear market, which will be followed by a multi-week corrective rally, which will likely retrace 38-62% of the decline from 4818 to 3636 before resumption the bear market. Until the weight of the evidence changes, then we shall treat the current bear rally as likely to expire in the days immediately ahead.

BEAR RALLY, SMALL OR LARGE?

Here is a quote from last week’s update: A series of lower lows and lower highs remain in place in the popular stock indexes in an inverted yield curve environment, which means the bear market remains in effect. However, the five-week trading range dating to the S&P-500 June low at 3636 may be on the cusp of a breakout above the high of the range according to TATY, SAMMY and STERLING, which represent dozens of supply and demand indicators all suggesting the same potential breakout above the high of the range. Investors should be aware that a powerful rally in a bear market does not a bull market make, and any breakout higher would likely be only be a rally in an ongoing bear market according to the weight of the evidence in the Lowry Research system and according to our own proprietary supply and demand indicators.

So, here we are a week later, and the yield curve remains inverted, which is often a harbinger of a coming recession, and the suggested price breakout above the then trading range has now happened. And, the weight of the evidence is still favorable that the rally is countertrend in an ongoing bear market. However, it appears the stock market has now drawn closer to answering the question of will the price decline accelerate lower upon the completion of this countertrend rally, or was S&P-500 3636, the low to date for the bear market, the terminus of the first leg down in the bear market to be followed by a more substantial correction than the one currently likely nearing an end? In either case a near term end to the rally, or if the first leg down is complete and a larger multi-week correction to the first leg down is underway, whichever is happening will likely still be only a rally in a bear market.

For the time being, and until there is hard evidence to the contrary, we will be treating this rally as nearing completion to be followed by another phase of decline in an initial leg down in a nascent bear market. If this is the case, then in the days ahead, and perhaps by early August or sooner, we should have confirmation by way of a change in the weight of the evidence.

TATY — A REPRESENTATIVE FOR 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 at on oversold 130 level above the caution zone but below the red zone surrounding the 140 level. Long time readers of these updates recognize the importance of the looming red zone just above, because a failure of the TATY rally in, or near the red zone would trigger a new “Big Chill” warning, which would likely be the death knell for the bear rally. “Big Chill” warnings have an enviable record of warning of significant tops, or in the current case the potential expiration of a significant bear market rally. Tops of all stripes tend to tie analysts in knots, because tops tend to be wispy and gossamer like events unlike bottoms, which tend to occur in a total collapse into fear and panic selling, and therefor show up more dramatically in various market metrics.

Investors should notice that TATY is currently struggling below the down sloping magenta negative divergence line dating to last August, and has not generated enough strength to assault the red zone surrounding the 140 level, which implies this rally is just a bounce likely to fade in the days ahead.

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 in red and green candle chart format overlaid. SAMMY has rallied above its down sloping dashed magenta negative divergence line but remains below its dashed red horizontal resistance line. This implies the rally has enough residual strength to linger for a few days but will likely fail below the dashed red horizontal resistance line, unless TATY, SAMMY and STERLING develop some near term strength, which would be unusual at this stage of development.

STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING

STERLING is shown above in the upper panel with the S&P-500 eMini contract shown in the lower panel. STERLING often negatively diverges with the rising price prior to profitable levels at which to sell long positions. STERLING has just painted a higher high with no negative divergence in place, which implies the price rally likely may linger. This configuration is basically confirming the residual strength in the price being suggested by SAMMY. So, for now TATY is odd man out relative to SAMMY and STERLING, which means we need to see more “cards” before these three indicators align. This grades out as implying the price rally is not likely done but may be subject to weakening.

As usual Screenshot-920 (above) and 921 (below) are shown above for your additional perspective and information through Friday’s close. Regarding Screenshot-920, I suspect that the lower dashed magenta horizontal resistance line (broken previous support) will likely contain any additional rally. If not and the upper red dashed resistance line comes into play, then depending on the weight of all the evidence at the time, we may be able to determine that S&P-500 3636 was the terminus of the initial leg down in a nascent bear market of unknown degree and duration.

Screenshot-921 has been shown several times previously and shows Fibonacci projected support zones beginning at two different major bottoms, namely March 23, 2020 at approximately S&P-500 2190 and March 9, 2009 at 666. There are near overlaps in the projections at the 3800 and 3200 levels, of which 3800 has already come into play leaving 3200 as a significant target. Support zones created by the long rally to the all-time high at S&P-500 4818 are shown as blue rectangles. The color coding for retracement levels is identical with orange equal to 25%, red 38%, yellow 50% and green 62%.

As long as S&P-500 2190 is not violated on a closing basis, then we will treat this bear market as a correction of the leg up from the March 23, 2020 low to the all-time high at 4818. Should S&P-500 2190 be breached on a closing basis, then in our view that would be confirmation of a larger degree bear market at work with very serious implications for client wealth, and for potential economic, social, political, and geopolitical unrest and/or chaos.