EXPECTATIONS Vs. HISTORY

THE BOTTOM LINE

The stock market has rallied above important resistance at S&P-500 3911.79 perhaps triggering a more complex and time-consuming upward correction. Corrections are often frustrating, because there are multiple ways for corrections to develop from simple (short) to complex (lengthy). The odds now favor complex over simple, so investors should focus on the primary trend, which remains a bear trend with attendant volatility and episodes of violent price movements, both up and down, until the classic signs of a capitulation bottom (exhausted sellers) followed by resurgent demand arrive. In between these two extremes volatility will likely remain the norm.

EXPECTATIONS Vs. HISTORY

Here is a quote from the first line of last week’s update: “The stock market analysis for this week is simple relative to the normal complexity for which bear markets are usually known. A rally above the November 1^st bear market rally high at S&P-500 3911.79 would imply the rebound rally is likely going to turn into a more complex formation lasting perhaps weeks”.

After drifting lower early in the week, the stock market produced a prodigious rally after the CPI posted a lower-than-expected decline resulting in a scramble back into “risk” assets like equities based on the premise that the Fed will begin to lower interest rates sooner than expected. This notion is counter to the actual history of inflation, which tends to be difficult to extinguish once it becomes evident in the financial system. However, this notion is completely compatible with the expectations in our instant gratification society, history be damned. This episode is a good lesson in the notion that expectations drive markets and not the reality contained in factual news, if one can find factual news in this age of misinformation.

This week’s update will compare what the stock market is telling us through supply and demand-based indicators powered by objective and measurable market generated information, as opposed to guesses about the future actions of the Fed on the part at least of a couple generations of market professionals, which have never experienced a rising interest rate cycle. In a profession mostly dominated by the brightest of the bright, there is no substitute for the experience of those, which have earned their success and professional survival in the crucible of the market.

TATY — A REPRESENATIVE 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 above the caution zone at 135 and may be moving into position to flash another “BIG CHILL” warning, which have a superb history of catching major tops and/or significant tops during bear market rallies. Already this year TATY called the January 5^th all-time high and the two bear market rebound countertrend rallies expirations to date. Having already spent some time in the caution zone surrounding the 115-125 level, then all that is required for TATY to post another “BIG CHILL” warning is for the current rebound rally to stall in, or near the red zone surrounding the 140 level, which may take some time to play out given that the bear correction looks to be turning more complex having successfully rallied above S&P-500 3911.79.

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. While SAMMY managed to rally above its down sloping dashed magenta resistance line, it appears to be weakening short of its horizontal dashed red long term resistance line. The failure of SAMMY to generate enough strength to rally above its horizontal dashed red resistance line would cast a shadow on TATY’s ability to surpass the red zone surrounding the 140 level. So, the bottom line for TATY and SAMMY is they both most continue to gain strength or the rally in the price may be at peril. One wonders how many rally failures it will take before investors become frustrated and sell?

STERLING — A PROTOTYPE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATOR UNDERGOING TESTING

Sterling is shown above in the top panel with the S&P-500 eMini futures contract in the lower panel. STERLING has an excellent history of painting out both positive divergences prior to tradable bottoms and negative divergences at levels favorable to taking profits during rallies. The sharp rally of late this past week failed to be confirmed by STERLING, which appears to be in the early stage of forming a negative divergence with the rally in the price. If such a prodigious rally, more than 1200 Dow points, fails to drive STERLING into a leading indicator as opposed to a lagging, then one must wonder if the rally has staying power. This budding negative divergence, down sloping dashed magenta line, must be watched carefully in the days ahead against the “one day wonder” rally of last week, up sloping dashed green line.

Screenshots-1041 (above) and 1042 (below) show the S&P-500 eMini futures contract and S&P-500 cash index breaching their lower resistance lines together with higher horizontal resistance lines drawn in so readers can track where the next important battles between the bulls and bears may be likely to occur in the zone surrounding S&P-500 4100. While not required, there are rebound targets in the 4100s, which may come into play before enough weakness develops to reverse this likely more complex phase of the rally. However, given the lack of signs of capitulation at the recent S&P-500 3491 low, we will continue to treat the rally as countertrend in an ongoing bear market.

Screenshots-1043 (above) and 1044 (below) have been shown numerous times before and are updated here through Friday’s close for your additional information and perspective. There is no change in the analysis or implications, but please notice the importance Fibonacci can play in stock market analysis, as the low to date for the eleven-month bear market has been approximately the Fibonacci 50% retracement level (solid yellow line) in Screenshot-1043 of the rally from the March 23, 2020 low at 2190 to the January 5^th all-time high at 4818. Unless S&P-500 2190 is breached on a closing basis, then we will continue to treat the bear market as a correction of the most recent leg up in an ongoing bull market from S&P-500 2190 to 4818.