This past week volatility did increase as the Dow Jones Industrial Average gyrated hundreds of points intraday. These gyrations in the price did cause our measures of the balance of supply and demand to trigger the appropriate setup for the purchase of our preferred exchange traded funds (ETFs) the VOO, which tracks the S&P-500 index, and the QQQ which tracks the tech heavy NASDAQ. Trading operations were conducted during the week, when our proprietary premium/discount indicator signaled the nominal premium at which our domestic stock indexes normally trade had been compressed into a (fleeting?) discount. Friday was a particularly volatile market day, but by the close most of our purchases for the week were at breakeven, or in some cases profitable, as evidence of exhausted sellers gave way to the first evidence of resurging demand. It was a very tough week for those not armed with effective indicators with proven records of success in the crucible of the stock market.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC BIG PICTURE SUPPLY AND DEMAND INDICATORS.
TATY is shown in the first chart above in yellow with the S&P-500 overlaid in red and blue weekly candle chart format. Most investors would agree that this past week was very volatile and violent, but TATY takes out the daily noise and gives us a bigger strategic perspective. The indicator did confirm that the nominal premium had been compressed into a modest discount during the week (see lower panel on the chart), and that for the time being no “Big Chill” warning had been issued even though volatility had spiked. This implies that the stock market is still likely to assault new all-time highs once this correction has run its course, if it has not already.
As long as TATY holds above the caution zone surrounding the 115-125 level, then the probabilities suggest that demand remains sufficiently strong enough for another assault on new all-time highs. TATY may have bottomed on Friday in the red zone surrounding the 140 level, which would be historically a sign of strength, if the indicator has indeed bottomed.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown in the second chart above with the SPXL 3X leveraged S&P-500 ETF overlaid, and in the last chart below by itself. SAMMY has completed a buy signal by painting out a “whole body” bar below the lower Bollinger Band shown in red. This is the first half of the signal, which represents the zone where sellers usually have exhausted their propensity to sell. Exhausted sellers is a necessary condition for a tradable bottom, but not a sufficient condition. Please note the SPXL is not traded in client accounts, but is traded in my personal account, and some selected family accounts.
To complete the SAMMY buy signal there must be objective evidence of resurgent demand, which did occur on Friday. Thursday’s candle is shown in the last chart above with a vertical blue line through it, and investors will note the fat part of the bar, the “whole body” portion, did paint completely below the lower Bollinger Band shown in red. Now please note how the next bar, Friday’s bar, painted a “whole body” completely above the lower Bollinger Band. It takes buyers coming into the market in size to have this kind of result paint on the chart! In my world this is objective market generated evidence of a significant change in the balance of supply and demand. Add to this the evidence of compression of the nominal market premium into a modest discount, and one can make a case that the probabilities favor a tradable bottom is in the process of forming, or perhaps is already complete. In a perfect world the discount would have touched the lower red line at minus eight on the weekly TATY chart, but alas the stock market is not a perfect world, and failure to touch the minus eight zone may be a hint that this correction is not quite done.
This is a game of probabilities and not certainties, and this is what favorable probabilities look like in terms of the objective supply and demand measurements shown above.
THE BOTTOM LINE
The bottom line is strategic big picture supply and demand indicators still favor demand over supply, which suggests another assault on new all-time highs is likely once the current correction has run its course. Tactical supply and demand indicators have completed the minimum requirements for the formation of a tradable bottom, which are evidence of exhausted sellers followed by evidence of resurging demand. While the Friday low may be tested in the days ahead, the odds remain favorable for a renewed assault on new all-time highs in the weeks ahead.
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