THE BOTTOM LINE
During bear markets oversold conditions can become even more oversold as the price continues to make lower lows. Numerous supply and demand indicators remain oversold, which may yield to a powerful but relatively brief countertrend relief rally. Any countertrend rally erupting out of the current oversold conditions will likely encounter resistance surrounding the S&P-500 3800 level. A violation of projected Fibonacci support surrounding S&P-500 3500 may lead to an immediate assault on the next important support surrounding the S&P-500 3200 level in a potential acceleration lower in the price. Investors should expect typical bear market behavior and high levels of volatility in the days and weeks ahead.
Last week’s update alerted investors that during bear markets very oversold conditions can become even more oversold, and that is exactly what happened this past week, as a bad inflation number was followed by a decline intraday to a new bear market low in all the popular stock indexes. Then no sooner than the new low was established, a violent and powerful rally began leaving the Dow up over 800 points, which triggered numerous financial news outlets to comment on “the wild day” on Wall Street.
However, regular readers of these updates should not have been surprised, because we have repeatedly admonished investors that violent and powerful rallies are a characteristic of bear markets, but unfortunately tend to fade quickly. These countertrend rallies are the “Siren’s Song” of bear markets teasing investors into staying long the market, so the bear can rip them time and again. Bear markets are insidious masters of disguise and clever destroyers of accumulated wealth capable of victimizing even seasoned investors.
Investors are likely dealing with a bear market of a very large but unknown “degree”, which is likely still in its early innings. So, prudence requires defense over offense in portfolios, until there are objective and measurable signs that the bear has spent its fury into exhaustion, and then evidence emerges that fearless investors are storming back into the market to scoop up perceived bargains. Unfortunately, few investors will be able to overcome their fear, when that golden moment does eventually arrive, so great will likely be the carnage, and numbers of imposter bottoms like the one this past week along the way before reaching THE bottom born out of chaos, raging fear and panic selling.
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 at a deeply oversold 110 level, but without any divergences, negative nor positive, in place. The current decline will likely continue until a positive divergence begins to develop, because TATY has an enviable record of positively diverging in advance of bottoms and negatively diverging as tops build out. Likewise, the Premium/Discount indicator in the lower panel, which finished the week marginally above the minus eight (red horizontal line) deep discount level. TATY remains deeply oversold, but with the price having just touched a new bear market low, indicators may remain oversold as the price probes even lower lows.
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 green and red candle chart format. The 800-plus Dow rally this past week barely phased SAMMY, which remains below the lower long term support line, and with no positive divergence having developed. SAMMY is basically confirming TATY, which suggests the price may go lower, even in oversold conditions in numerous supply and demand indicators, which is a situation ripe for volatility.
STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above in the top panel with the S&P-500 eMini futures contract in the lower. STERLING continues to paint out a series of lower highs and lower lows after its preceding buy signal in advance of the early October rally. STERLING, like SAMMY, is confirming TATY, so the price may defy oversold conditions and continue to decline. If a countertrend rally does develop off these oversold conditions, it will likely encounter resistance at S&P-500 3800. If the price is too weak to develop any meaningful rally back toward S&P-500 3800, then the probability of a “point of recognition” having been reached will increase substantially, and with it the probability of an acceleration lower in the price.
Screenshot-1016 (above) is the S&P-500 cash index shown with a horizontal dashed red line with contained the previous powerful multi week countertrend rally, and what I now expect will be resistance surrounding the S&P-500 3800 level shown as a magenta horizontal dashed line. A rally back to S&P-500 3800 is not required but is shown here as a reminder that powerful bear rallies are a characteristic of bear markets, but also characteristic is their tendency to expire at lower lows, in this case perhaps the level surrounding S&P-500 3800, or lower.
Screenshots-1017, 1018 (both above) and 1019 (below) have all been shown previously and are updated through Friday’s close for your additional information and perspective. Please note that the projected Fibonacci support shown as a yellow horizontal line in Screen-shot-1018 did act as support off which last week’s powerful bounce began, so this level may require several days to breach. A breach of the zone surrounding S&P-500 3500 on a closing basis may result in an acceleration lower and an assault on the next support surrounding the S&P-500 3200 level.
Screenshot-1019 shows a larger quarterly perspective of a Fibonacci projection also with horizontal rectangles of support zones created by the long rally into the S&P-500 all-time high at 4818. The Fibonacci projection begins at the March 9, 2009 low at the biblical 666 level and ends at the all-time high at 4818. A breach of S&P-500 2190, the March 23, 2020 low, on a closing basis would trigger the larger perspective on the developing bear market and confirm that investors are experiencing a bear market of a very large but unknown “degree”, which likely has not been experienced in generations. Such a development, a breach of S&P-500 2190 on a closing basis, would have very serious global social, economic, political, and geopolitical implications. If the current bear market ends without a closing breach of S&P-500 2190, the March 23, 2020 low, then investors will have experienced a “normal” correction of the previous bull leg up in an ongoing great bull market. The difference in the two potential outcomes is magnitudes of order different in terms of the potential for wealth destruction, and relative global chaos.