THE BOTTOM LINE
The price began a strong recovery from its three and a half percent decline this past week driven by three eighty percent upside days. So far, the recovery has been about seventy percent of the previous decline in a very short period. However, so far the strong rally has not erased the negative divergences in the TATY, SAMMY and STERLING supply and demand indicators, which will cast a shadow on the price rally, if these three indicators fail to confirm any new all-time high(s) in the price.
To date, the condition of the balance of supply and demand has not changed enough toward the negative to compel us to take any defensive actions in portfolios, but we shall remain vigilant for the arrival of objective market generated information, which may cause us to change our stance more toward defending and protecting accumulated wealth versus growing it with the least risks possible.
The last Fed meeting of the year is next Wednesday, and it will likely be closely watched with evidence growing that inflation has likely been under-estimated by the Fed.
Sloppy Top
My apologies to all the University of Tennessee alumni for usurping their favorite song, “Rocky Top”, in the banner header above, but the fit was just too good to pass up, because those two words pretty much sum up the current state of the stock market.
If the bears are finally right, then the topping process has become downright sloppy during a three and a half percent decline kicked off with a ninety percent downside day, which has now yielded to a strong rally imbedded with three eighty percent upside days, which has also resulted in a more than seventy percent recovery of the shallow decline. And, given the continuing prominent strong negative divergences being registered in a host of supply and demand indicators “sloppy” would seem to be the perfect adjective, as the price may attempt to assault new all-time highs in the S&P-500, even as negative divergences remain.
If this process becomes drawn out over a period of weeks, or months, then it will remind me of the 2000 top, which began in March and continued sideways until a slightly lower secondary, and final top in October (Screenshot-477). What followed the October top was a nasty bear market in the Dow and S&P-500, which straight away got down to the serious business of wealth destruction, eventually wiping out a bit less than ninety percent of the value of the tech heavy Nasdaq.
Of course, before one gets too bearish, one should remember global markets are awash in liquidity compliments of central banks flooding the financial system with unprecedented liquidity, and governments adopting deficit (debt) driven fiscal policies in an all-out effort to ward off the potential economic challenges being driven by the COVID pandemic. So economically we are “plowing new ground”, and as my late father once observed after plowing some “new ground” with a mule in Ochlocknee, Georgia: “When plowing “new ground” one is likely to encounter some roots and stumps”. And his observation obviously applies to economic “new ground” as well.
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. After declining deep into the caution zone surrounding the 115-125 level for two weeks, TATY has now rallied strongly back into the red zone at the 141 level. This completes the first step toward a new “Big Chill” warning, so it is very important to carefully monitor TATY for weakness resulting in a stalling out in, or near the red zone surrounding the 140 level to complete a new “Big Chill” warning. Especially, if the S&P-500 goes on to touch new all-time highs. “Big Chill” warnings have a consistent history of often preceding significant corrections, and/or bear markets.
Investors should also observe that the recent negative divergence of TATY to the price has now grown more pronounced, even after the strong recovery in the price. The negative divergences are shown as down sloping magenta lines on the chart, both on the upper TATY chart, and on the Premium/Discount part of the indicator in the lower panel.
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. After negatively diverging with the rallying price for weeks, SAMMY plunged first below the red resistance line, and then below the yellow support line to signal a significant change in character. This week SAMMY rallied with the price, but by the close on Friday was still negatively diverging with the strongly rallying price. If the price makes a new all-time high(s), but SAMMY fails to rally above its previous high, then the long-standing negative divergence of SAMMY to the price will remain in place, which would not be a healthy sign.
STERLING — A REPRESENTATIVE PROTOTYPE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
A prototype version of STERLING, of which more than two dozen are being tested for their trading effectiveness, is shown above. This version of STERLING continues to do a good job of painting out “island” bottoms, and/or positive divergences before tradable bottoms. SAMMY continues to paint out negative divergences prior to significant tops, and did so again in advance of the recent three and one-half percent decline, which ended this week. The negative divergence shown by the dashed magenta lines steepened this past week, even as the price managed a robust rally. If the price makes a new all-time high(s), but the negative divergence remains, then this would grade out as a significant concern.
A different version of STERLING 1 is shown in a weekly format. This version also negatively diverged as the price was driving to new all-time highs, and then STERLING crossed below its middle Bollinger Band as the price topped. This version of STERLING is currently lagging the strong rally in the price, and if the price makes a new all-time high(s), but STERLING fails to match its previous high, then like TATY and SAMMY, STERLING would be casting a shadow of doubt on the ability of the price to sustain a continuing rally.
Screenshot-475 and 476 (both above) are of the S&P-500 cash index in daily and weekly format for your additional information. Please notice in Screenshot-476 that the up sloping long term trend line was not broken during the S&P-500’s minimal decline of three and a half percent off the high.
Please stay safe!
HAPPY HOLIDAYS!
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