THE BOTTOM LINE
A rare diagonal triangle, on a smaller scale than originally anticipated, has gone to completion, and a “waterfall” decline has taken prices back below where the diagonal began, which is in accordance with the text book. The decline through Friday’s close has taken the price within looming support, and how the stock market reacts to support over the next several days may have implications for a decline lasting through the summer, and/or fall. On the contrary, should the price decline halt at support, then a decision will be at hand to buy replacements for the recently sold laggards as the price was touching multiple new all-time highs. Investors may know before the July 4th holiday whether a buying opportunity is at hand, or if more decline will be necessary to reinvigorate demand. A price break below multiple support zones would imply a summer, and/or fall of rising volatility, and perhaps additional correction in the price.
As an aside, the rally in the bonds appears to be counter-trend, which implies sharply rising interest rates once the rally in the bonds expires. The bond rally also looks poised to perhaps finish before the July 4th holiday, so a number of factors appear to be coming into place for a potentially volatile summer and/or fall.
Diagonals
Lat week’s update explained that in my opinion, born of decades of doing stock market research, that one did not have to fit into the analytical spectrum as either a fundamental or technical camp, as certain aspect of both approaches simply do not work with any statistically correlated accuracy. However, certain aspects of both do appear to have records of success, when applied in the crucible of the stock market.
In the technical approach to market analysis, specifically raw chart analysis, triangles and diagonal triangles have a high probability of success provided they actually hold together to completion. Unfortunately, diagonal triangles, or rising wedges, occur at a much less frequent rate as their more common cousin the horizontal triangle, which only occur prior to the last move in “a sequence”, which is usually a short “thrust” higher, if the sequence is a bull movement, and lower if the sequence is a bear movement. Obviously this is valuable information, especially if one is trading in shorter time frames. Rising wedges, or diagonal triangles, also provide very valuable information, since they appear only as the last movement in a sequence bull or bear, and are usually followed by a waterfall like decline back to where their development began in a bull sequence. These appear infrequently, and in recent years skewed more toward the “rare” end of the spectrum.
Days ago I alerted clients and research customers that a diagonal triangle may be in progress in the eMini S&P-500 futures contract, and for days the progress in the development followed the text book quite well. However, as the potential diagonal approached what should be its termination the development began to wander off the ideal path expected for diagonals, and this was noted in last week’s update, even though the expected low volume, tepid, and overlapping movements typical of triangles and diagonals continued. Screenshot-241 shows the diagonal in magenta as I originally published it in the weekly update. Obviously deep into development the price was unable to maintain the lower boundary of the idealized diagonal as drawn. However, everything else was screaming “triangle” so what happened next should not have come as a surprise.
Screenshot-242 shows the diagonal as it actually completed this past week drawn in yellow, as a smaller version of the expected larger. The stock market in its role as master of disguise allowed us to notice some aspects in development, but threw us a change up on the size, while keeping to the guidelines expected. The smaller diagonal did go to completion, and a “waterfall” like decline has now also come to pass. And, this information was useful as we trimmed some lagging holdings into the multiple all-time highs as they were being touched intermittently. The “waterfall” decline will now allow us to eye some replacements for the laggards we sold. However, this is where the next several days things will likely get a bit tricky.
The post diagonal triangle “waterfall” like decline has brought the price in range of some important support, and how the market handles this support will compel us to become buyers, or to step aside for perhaps a better price level to enter back into the market with new positions. This dilemma is where our strategic and tactical supply and demand tools will likely take on more importance, as a case can be made that the stock market needs to digest its gains made over the last several months. This implies the current weakness could linger, perhaps even through the balance of the summer and fall. And, then there is the issue of an internationally renown bear, which has published that a bull sequence dating back to the 1700s in the English stock market is ending, and a great bear market is just beginning. Most of us in this game know from experience that getting the stock market right even over short periods of time is a huge challenge, so making decisions based on analysis dating back to the 1700s would appear impossible.
However, here is the rub, this particular analyst is internationally famous for a reason, which is some of his most ostentatious calls have come true! If he is or isn’t right does not change the immutable law of supply and demand, so we will hold fast to our indicators based on measuring the strength, or weakness of the balance of supply and demand, and then act on that information to reward us if the bull lives on, or compel us to shift our asset allocation, if a great new bear market appears as a bull sequence dating to the 1700s is ending, and a bear of similar magnitude of degree is beginning.
As an aside before I get a lot of emails on this observation about what could cause such a dramatic change, here is one notion where multiple candidates exists to ponder: Oceans of global debt assaulted by an unexpected and dramatic shift to higher interest rates on that debt. Will such a shift actually happen, well we do not know, but the weight of the evidence is strong that the bull market in bonds, read lower interest rates, since 1989 has likely ended, and a new multi-decade rise in rates has begun, with serious implications for individuals, corporations and governments at all levels, which are heavily indebted.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-280 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week marginally below the red zone surrounding the 140 level after failing to assault the blue zone at the 160 level. It remains to be seen if the price holds the looming support zones, or if both the price and TATY continue to decline. A TATY decline into the caution zone surrounding the 115-120 level would set up the first step in a new “Big Chill” warning, and perhaps a rebound in the price to below the recent all-time highs.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY has turned down after failing to erase the negative divergence dating to the February 2020 all-time high (down sloping dashed orange line). This continuing negative divergence is a warning that the recent new all-time highs have been accomplished with less force behind them than at the February 2020 all-time high. The weakness in SAMMY has been a long time concern and frustration, but the recent diagonal triangle resolution into a “waterfall” decline in the price continues to imply SAMMY may be foreshadowing more weakness to come.
Please be safe!
