THE BOTTOM LINE
The Dow has touched new all-time highs unconfirmed by the S&P-500, and the Nasdaq, in an environment where the stock market is generating mixed messages. TATY and SAMMY are developing negative divergences with the rising price, and STERLING has just issued a new “island” buy signal, only to give way to a so far tepid rally. This is a positive seasonal time of year, when a flood of additional liquidity is being added to excess global liquidity due to year-end pension fund, 401-K and IRA contributions. Given the mixed market messages, any rally to new all-time highs may occur as a struggle higher, unless otherwise interrupted by, and/or arrested by adverse global events.
Global Risk
The Dow managed a new all-time high this past week, but so far the S&P-500 and Nasdaq have not confirmed the new high in the Dow. Once again the assault on new all-time highs is happening on less than wonderful measurements of internal strength, but also in the context of strengthening Lowry Research measurements of supply and demand in the bigger picture. So, the stock market is generating mixed messages with regards to its future prospects.
Given the mixed messages, and some signs of fatigue in the rally, plus the dangerous world we live in, investors should not be surprised that the stock market remains vulnerable to the arrival of an adverse global event(s); an invasion of Ukraine or Taiwan, or both, comes to mind. If Mr. Putin’s domestic difficulties caused him to want to unite his country behind him by invading his neighbor, and test Mr. Biden and NATO in the process, then one could imagine China would see an opportunity to cause more mischief in the South China Sea at the same time.
History is filled with examples of rising powers like China giving in to the urge to apply their newly found economic and military powers. Alternately, a legitimate threat to the global financial system does not have to be military in nature, as a melt down in the China real estate bubble could roil global markets. The China bubble, which has minted new millionaires at a rate never seen before, makes the 2007 real estate bubble in the United States pale in comparison, as a recent article reported many average Chinese are making mortgage payments on as many as, count them, four homes!
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 marginally lower at 147, and just above the red zone.
TATY has developed a new marginal negative divergence (Down Sloping Orange Line) as the Dow touched a new all-time high this past Monday, unconfirmed by the S&P-500 and Nasdaq. There is also a new negative divergence forming in the Premium/Discount indicator in the lower panel of the chart, shown as a down sloping orange line. TATY has not painted out a “BIG CHILL” warning signaling sharply rising risks, nor has it begun to oscillate forming bottoms in, or near the red zone surrounding the 140 level, and tops near the blue zone surrounding the 160 level, signaling growing strength to power the rally higher. A break down into the caution zone surrounding the 115-125 level would be the first step toward the formation of a new “BIG CHILL” warning.
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. SAMMY has broken out above its dashed red resistance line, and the price has followed to new all-time highs. However, SAMMY remains below the high it achieved in February 2020, and is now also developing a short term negative divergence to the new high in the Dow. A decline below the dashed red resistance line would be a sign of fading underlying strength powering the rally, and a follow on breach of the horizontal dashed yellow support line would be a strong signal that the rally was in trouble.
STERLING — A REPRESENTATIVE PROTOTYPE OF A FAMILY OF NEW SHORT TO INTERMEDIATE TERM TRADING INDICATORS
A version of some two dozen plus variations of the STERLING family of trading indicators under going testing for their effectiveness at locating tradable tops and bottoms is shown above in the top panel with the S&P-500 Emini futures contract shown in the lower panel. STERLING is testing well by painting out “island” bottoms below the lower Bollinger Band, and/or positive divergences, as bottoms are forming; and strong negative divergences as price rallies wane, and begin to give out of gas.
Sharp eyed investors will notice that STERLING painted out a new “island” bottom marking the low in a decline on Wednesday, which has now been followed by a very tepid rally short of new all-time highs. This “island” signal was the first since mid-September. These “island” bottom events signal high percentage trading opportunities, as they are visual representations of market “pressure points” often accompanied by a whiff of panic. Panic is a traders friend, as it tends to purge “weak hands” from the system, as they stampede into “strong hands” on the opposite side of the trade. Strong hands eventually control markets.
Bottoms made on “islands” tend to be followed by rallies lasting days, so it will be interesting to see if this bottom, made in the midst of otherwise “mixed messages”, lingers long enough to press new all-time highs.
Please be safe!
