Range Bound

THE BOTTOM LINE

Support at S&P-500 3200 has been tested and held, which has given way to a sharp and strong rally back to both price and indicator resistance. There is evidence of strongly increasing demand, which will need to increase even more at the margins for both the price, and the tactical supply and demand indicators to breakout higher. So, the implications of the current metrics is that a renewed assault on new all-time highs is just as likely as the price remaining range bound. The days immediately ahead will likely be critical in determining, if the market will remain range bound, or if new all-time highs are in the offing.

Range Bound

The impotent bears have once again repeated their recent behavior of driving the price sharply and dramatically lower only to fail to generate enough strength to breach an important support level at S&P-500 3200. And, the budding positive divergence in a series of tactical supply and demand indicators mentioned last week has now given way to a persistent rally driven by improving internal measurements of strength in demand. However, we also mentioned last week that “regardless of the direction of the trend, volatility is likely to increase” and it has. So, we have experienced a highly volatile market environment, but one which at this point remains range bound between the September 2-3 all-time highs and strong support at the S&P-500 3200 level.

The numerous uncertainties surrounding the election will likely begin to decline with the change in style and substance represented by the transfer of power to President-elect Joe Biden. However, the election failed to deliver a definitive decision regarding the overall political balance of power, which must now wait until a run-off Senate election in Georgia for two Senate seats, which could change the overall balance of power in favor of the Democrats, something which would have seemed impossible in my home state of Georgia only a few days ago.

Of the ten million plus population in Georgia, seven million live in the Atlanta metro area, which has been changing ever since my days at Georgia Tech, when Atlanta was promoting itself as the “next great international city”, and the “city too busy to hate”. Certainly the Atlanta of “Gone With The Wind” has indeed changed dramatically in the years since Union General William Tecumseh Sherman burned it to the ground during his famous “march to the sea”. I suspect that until the Georgia Senate run-off is settled, the stock market may remain range bound, but the increasing strength in some demand measures, as the rally developed this past week, suggests an assault on new all-time highs is increasingly likely. So, our tactical supply and demand indicators continue to tell the truth, even in this elevated volatility environment.

TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in Snapshot-380 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 127 marginally above the caution zone extending from 115 to 125. The 127 level keeps the months long negative divergence in this indicator intact.

Last week’s update noted that TATY had declined to a level where in normal times investors would start looking for an investable bottom. And, that some tactical supply and demand indicators were showing signs of a budding positive divergence, which continued and did foreshadow the strong rally of this past week. However, the negative divergence in the TATY indicator shown by the down sloping magenta line in Snapshot-380 remains, and continues to suggest that the rally off the March 23 low is different from rallies off other big bottoms during previous decades, and perhaps is part of a large evolving topping process being drawn out over an extended period of time. In any case TATY is warning that something is very different about the post March 23 rally, but in what way it is resolved remains to be seen.

SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown in Screenshot-173 (above) in daily format, and in Screenshot-174 (below) in Weekly format. The price is shown in both charts in red and blue candle chart format.

The budding positive divergence of last week between the indicator, and the still declining price, was resolved in favor of the indicator as the price see-sawed above the 3200-3300 level, and then sprinted higher chasing the positively diverging indicator higher. The internal measurements of demand increased sharply as the indicator flew higher, and only faded slightly as the weekend loomed on Friday. A case can be made that demand has increased enough for the price to mount a renewed assault on new all-time highs, or if internal measurements of the strength in demand decline early next week for the price to remain range bound, perhaps until resolution of the Senate races in the Georgia run-off in January. Why?

The answer is that even though demand increased sharply this past week both the strategic indicator TATY, and the tactical indicator SAMMY are still showing negative divergences in place. Opinions about the potential impact of an election on the market, and the reality of objective measurements of supply and demand, are two completely different things. In the arena of the stock market opinions can cause large losses, and the safer path over time is to adhere to the story being told by objective measurements of supply and demand, which at the moment still show a negative influence (divergence) on the probable path for the price.

Screenshot-173 shows the short term positive divergence which started forming a week ago, and then the bottom in the price followed by the price chasing the positively diverging indicator higher. Sharp eyed investors will notice that both the indicator and the price have arrived again at previous levels of resistance. This implies a struggle to go higher may develop as early as next week, so the dilemma is has the increase in demand of this past week sufficient to break the price out above previous resistance, or has so much demand energy already been expended that now it is the bulls turn to once again be turned back in their quest for new all-time highs. Unfortunately, the answer to that important question will likely need more data before being resolved.

Screenshot-174 shows SAMMY in weekly format with the price shown in red and blue candle chart format. Screenshot-174 shows the negative divergence prior to the February high with the down sloping magenta dashed line. Investors will notice immediately that even with the evidence of strongly re-surging demand this past week, the indicator has only managed to rally back to its resistance represented by the horizontal magenta line. It is very likely that additional strength in demand at the margins must be achieved in order for the indicator, and by implication the price, to break out above indicator resistance represented by the horizontal line, and price resistance represented by the previous October 12 rebound high in the S&P-500 at 3549.85.

While it would likely take several days for the price to roll over and then mount another decline if it fails at, or below 3549.85, it would take a follow on breach of S&P-500 3200, on a closing basis, to characterize the decline as the beginning of a significant correction, or budding bear market.

Please stay safe.