THE BOTTOM LINE
Investors should expect an attempt to rally prices higher in the days ahead, but alas this rally is likely doomed to fail as the weight of the evidence favors the rally being a counter-trend to relieve grossly oversold conditions. We are prepared to utilize a new “BIG CHILL” sell signal, confirmed by other supply and demand indicators, to take maximum advantage of any expiring counter-trend rallies, which may develop going forward. Bear markets are no fun, but they can be very profitable for nimble traders and investors armed with proven supply and demand indicators, and the courage to apply them.
Hibernation Over?
The S&P-500 declined intraday this past week to 3857, which means the ongoing correction is now within 0.05% of being an official bear market having declined 19.95% from the 4818 January 4-5th all-time high, accompanied by supporting evidence like a recent 90% downside day, a six-day streak of consecutive declines, and six consecutive weeks of lower lows.
While one can find exceptions, bear markets born of the correction of built-up excesses and rising interest rates are usually measured in years as opposed to the current nascent bear at four and a half months. So, we are inclined to believe the coming rally off the intraday low at 3857 will just be another counter-trend rally to relieve the compression in the price caused by the persistent bear leg down. Counter-trend rallies in bear markets tend to be powerful but short lived and given the extreme nature of the current oversold conditions the rally may take some time.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in yellow with the S&P-500 overlaid in red and blue candle chart format. After dipping below the caution zone surrounding the 115-125 level, TATY finished the week still oversold at the 124 level. I suspect TATY may be able to develop enough strength to rally back to near, or into the red zone surrounding the 140 level, where if it fails will signal another “BIG CHILL” warning, as TATY is prone to do during failing counter-trend rallies in bear markets. Given that so few indicators are effective at signaling significant tops, or the terminus of rallies in bear markets, TATY has some significant value because it is almost always does.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown in yellow with the S&P-500 eMini futures contract overlaid in red and blue candle chart format. SAMMY is rebounding from deeply oversold and will likely rally above its long time dashed horizontal yellow support line, but then fail below its negatively diverging down sloping dashed magenta line, most likely as TATY runs out of gas near the red zone, as these two indicators tend to confirm each other.
STERLING — A REPRESENTATIVE PROTOTYPE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
STERLING is shown in the upper panel with the S&P-500 eMini futures contract in the lower. STERLING does a wonderful job of painting out positive (green) and negative (magenta) divergences at tradable bottoms and tops respectively. STERLING positive divergence signals also tend to be highly effective when accompanied by an “island(s)” below the lower Bollinger Band. However, this week STERLING is a bit of an odd duck, because the bounce beginning Thursday was not foreshadowed by a positive divergence in STERLING, which may cast a shadow on the longevity of the bounce. If I were long the bounce, the failure of STERLING to confirm it would cause me some angst.
It is a bit of a puzzle why STERLING has not painted out a positive divergence signal, so I am watching this test of the indicator carefully. STERLING gave no signals all during the multi-day decline, which confirmed the decline, so for now I’m watching the rally with a jaundiced eye.
Screenshot-826 (above) shows the breach of the S&P-500 eMini futures contract at 4100 and the subsequent price action in daily format for your information. Screenshot-827 (below) shows the same daily chart for the S&P-500 cash index, again for your information. Investors will notice the series of lower lows and lower highs are now well established, and for as long as this is the case the price is likely to work lower.
The S&P-500 cash index in weekly candle chart format is shown below, after the breach of the red longtime support line, the breach of 4100, the breach of the first Fibonacci support at the orange 25% level and last week’s near touch of the Fibonacci 38% support line during the intraday spike to 3857. For now, we are treating this decline as a correction to the leg up from the March 23, 2020 low at approximately 2190 to the all-time high at 4818. In such situations the 38% Fibonacci level shown as a red horizontal line is considered a minimum target for a bear market decline. So, from this perspective the late rally last week looks like a bounce.
The crudely drawn in dashed white lines represent one way the decline may play out from here, but there are others which are valid. If 2190 on this chart is not breached before the bear market ends, then investors will just be enduring a normal pullback in an ongoing bull market, which in due course will be followed by a resumption of the greater degree bull market and new all-time highs. Given the rising interest rate cycle and a host of other challenges often detailed in these weekly updates, it is difficult to assign favorable odds to this hypothesis.
Screenshot-829 (above) is the same chart but with the additional Fibonacci support levels derived from the March 2009 S&P-500 low at 666. Investors will notice a convergence of Fibonacci support lines at the 3800 and 3200 levels, as well as horizontal blue rectangles displaying support created by the rally phase to the all-time high at 4818. The second derived support levels will only come into play should 2190 be breached on a closing basis. Given the reversal to a rising interest rate cycle after the bottoming of a 78-year cycle, we are inclined to assign this possible outcome as a probable outcome. This would also imply the potential for a multi-month and/or multi-year bear market to unwind the buildup of huge excesses in the global financial system over the decades of the declining interest rate cycle. In either case we expect our supply and demand approach to investing to serve clients well.
