THE BOTTOM LINE
In the absence of a new “Big Chill” warning, and with Lowry Research’s Buying Power back into the superior position relative to Selling Pressure, and with improvement in our own supply and demand indicators, the pressure is upon the bulls to prove they are back in control of the stock market. The bad news is a shallow 5% correction did not likely purge all the weak hands, and potential would be sellers from the mix, which in turn suggest a potentially fragile follow on rally, which may already be under way. How the price, and a host of indicators, behave as the price approaches new all-time highs will be critically important to the bull or bear case.
We have nibbled at taking some profit taking in some accounts, but we continue to refrain from taking wholesale defensive positions. If the current rally fails near new all-time highs, then the stock market may become very volatile quickly again. So we are watching the market carefully for clues about how it may perform in this last quarter of 2021, as the typical negative seasonal influence is likely to begin to wane. Statistically almost all the gains in the stock market have accrued during the period of roughly Halloween to Easter, which looms immediately ahead.
Changing Seasons
These weekly updates have been making the case for some seasonal volatility due to weakening Lowry Research measures of supply and demand, and the decay in our own measures of the changing balance in the supply and demand equation. For weeks these measures have been in a state of slow decay, but in our opinion short of levels, which would compel us to take swift and decisive action in our asset allocation in favor of defense over maximizing gains. We notified clients that we may make some marginal changes in already defensively postured accounts, but the weight of the evidence was not sufficient to compel us to make wholesale changes in favor of defense.
The strong rallies on Thursday and Friday suggests that the five week five percent consolidation in the major stock indexes may have been enough to reinvigorate demand to a level sufficient to make an attempt to assault new all-time highs, over-valuation and historically high levels of bullish sentiment notwithstanding. Excessive global liquidity, and the lack of a low risk alternative to equities appear to remain forces strong enough in tandem to position the price favorably for another assault attempt on new all-time highs. A renewed attempt to assault new all time highs also got some good news via Lowry Research as Buying Power regained the superior position relative to Selling Pressure, which should be a matter of concern for the bears.
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 much improved at 145 after positively diverging with the price (divergence not shown).
During the period following the September 2nd all-time high TATY failed to issue a “Big Chill” warning, as the price struggled to go lower. With the price now breaking above the 62% retracement level (Screenshot 413 and 414 shown above) a test looms immediately ahead for the price to make new all-time highs, or falter and then roll back down into an ongoing correction. The refusal of TATY to paint out a “Big Chill” warning continues to imply the bears do not have the necessary power to take charge of the stock market, and then change its direction from bull to bear.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. After spending some time “betwixt and between”, SAMMY has finally generated enough strength to rally to a new post March 2020 high, but is still below its February 2020 all-time high. If SAMMY continues to rally to new recovery highs, then that would put pressure on the price to continue to rally. The recent price weakness never drove SAMMY below its horizontal dashed yellow support line, which implies that the recent correction may be waning in strength, or perhaps even over. That remains to be seen, but SAMMY is not painting out a picture, which gives any comfort to the bears, nor to the bear case, having just broken above its horizontal dashed magenta resistance line.
STERLING — A REPRESENTATIVE PROTOTYPE OF A NEW FAMILY OF SUPPLY AND DEMAND INDICATORS
STERLING is shown in the top panel with the S&P-500 eMini futures contract shown in the lower panel. The STERLING prototype shown is just one of a couple dozen or so, which are being tested for their effectiveness at identifying short to intermediate tops and bottoms.
STERLING often signals exhaustion bottoms in the price by forming an “island” candle below the lower Bollinger Band, or in other cases positive divergences (depicted by up sloping dashed lines). STERLING also tends to form negative divergences as price rallies begin to give out of gas. Since tops of any duration represent huge challenges to identify, the STERLING family of indicators may become important tools, if their early performance at identifying these key areas continues.
STERLING has not formed any “island” bottoms in October to date, but it has formed two important positive divergences, which were followed by rallies in the price. These positive divergences are shown as up sloping dashed lines on the STERLING chart. Island bottoms on the STERLING chart tend to mark areas of exhausted sellers, where only positive divergences without “islands” tend to represent exhaustion of just some sellers, which in turn may give rise to weaker subsequent rallies in the price, since would be sellers may not have completely purged themselves from the supply and demand balance. In both cases, “island” bottoms and positive divergences, the price tends to be pulled higher by STERLING in like manner as the gravitational pull of a larger mass on a smaller.
In October to date in the absence of any “island” bottoms, positive divergences in STERLING have been followed by substantial rallies. This bodes well for this new indicator, if both “islands” and positive divergences continue to identify tradable short to intermediate bottoms. Obviously, the indicator may even help an analyst decide on how large a position to take, given “islands” below the lower Bollinger Band suggest potentially a more complete purge of would be sellers from the balance of the supply and demand equation. That is to say “islands” suggest a hard bottom has likely been hammered into place, while a positive divergence may suggest any follow on price rally may not be as strong as those following “island” bottoms.
In the current case the bears made a very good case within their discipline for an accelerating decline into a big new bear market, and in more normal times they likely may have been proven right. However, the positive divergences which formed in the STERLING family of indicators, and others, were having none of it by painting out positive divergences. The big remaining question now is will STERLING paint out a negative divergence before the current rally begins to expire, whether the rally gives out after achieving new all-time highs, or falls short. In the absence of a “Big Chill” warning having been issued, and with the price having now recovered more than 62% of the decline (Screenshot-413 and 414 both just above), then the odds are becoming more in favor of an assault attempt on new all-time highs. Touching new highs would put some very uncomfortable pressure on the shorts, so there is some potential for the price to spike into new all-time highs on short covering.
Please be safe.
