THE BOTTOM LINE
The slow moving and overlapping countertrend rally in stocks continues, but it has reached some significant chart resistance in the S&P-500 and eMini futures contract. Negative divergences are now under construction in several key supply and demand indicators, and if this process continues, they may confirm any new “BIG CHILL” warning, which may be issued in the days ahead by our TATY strategic supply and demand indicator. “BIG CHILL” warnings have a well-documented history of being extremely accurate at identifying major tops during bull markets and rebound (countertrend) tops during bear markets.
The positive seasonal trend in the stock market is now beginning to wane just as the price has arrived at significant chart resistance, and several key supply and demand indicators have begun construction on negative divergences. This implies the bear rally may expire in the days ahead as it succumbs to the growing strength in the negative divergences. If the bear market ended in a non-classic bottom at the October low, then I would expect our TATY indicator to begin to form tops in the blue zone surrounding the 160 level and bottoms in, or near the red zone surrounding the 140 level, which appears to be a very low probability.
Given the status of our supply and demand indicators, the conflicting information emanating from several Lowry Research indicators, uncertainties revolving around the safety of global financial institutions, and geopolitical uncertainties, we remain content to continue to adhere to our strategy of rolling over virtually risk free three- and six-month T-bills yielding 5% (plus or minus) until better risk adjusted opportunities are created by the bear market. Bear markets ferret out previously unknown weaknesses in the global financial system, which then often “spontaneously” collapse triggering a new crisis of uncertainty. Markets respond negatively to uncertainty, especially to crises where it is difficult to quickly calculate the extent of the potential risks of contagion. These are the realities of the world we now live in, making risk management our highest priority.
THE STRUGGLE AT RESISTANCE
Countertrend rallies in bear markets are often things to behold as they are frequently bursts of power causing the price to move many points higher in a sprint like fashion, which in turn causes many investors to believe that the worst is over, and a new bull market has emerged. The current bear market began on January 5, 2022 and has been interrupted several times by powerful rallies, which so far have lacked the ability to sustain a new emerging bull market. The current rally having not been preceded by evidence of a classic cathartic bottom fits the profile of a bear countertrend rally.
This past week the rally began to labor as we anticipated, when a recent update warned that the rally may linger near overhead chart resistance until TATY flashed a new “BIG CHILL” warning confirmed by the development of negative divergences in several key supply and demand indicators, a process which now appears to be getting underway. Another factor which is likely to begin to exert some influence on the rally is the transition from a positive seasonal period for stocks to a negative one, where Easter is often the dividing line. Money tends to flow into retirement accounts from roughly Halloween to Easter, which professional investors must put to work, which helps create additional demand at the margins for stocks. That tailwind for stocks will now begin to abate just in time for the price having risen to meet chart resistance.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week marginally lower at 142 in the red zone after a previous excursion into the caution zone surrounding the 115-125 level, which completed the first step in a new “BIG CHILL” warning. If TATY is rejected in, or near the red zone, then a new “BIG CHILL” warning will be triggered. “BIG CHILL” warnings have a remarkably accurate record of identifying major tops in bull markets and rebound (countertrend) tops in bear markets. While the price may continue to loiter near resistance, a new “BIG CHILL” warning would likely extend the remarkable record of “the red zone being where bear rallies go to die”.
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 red and green candle chart format. SAMMY began construction this past week on a negative divergence (down sloping dashed magenta line) with the rising price. A TATY “BIG CHILL” warning is always bolstered, if it is confirmed by negative divergences developing in several other key supply and demand indicators. Hopefully, SAMMY and other supply and demand indicators will continue to develop negative divergences as TATY (slowly?) completes a new “BIG CHILL” warning. Given the slow and overlapping development of the countertrend rally to date, then it may take some time before the bear returns with a vengeance.
STERLING — A REPRESENTATIVE OF A NEW 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 panel. Like SAMMY, STERLING began construction this past week on
a tentative negative divergence (down sloping magenta dash line) with the rising price. So, it appears that SAMMY and STERLING are beginning to position to confirm any new “BIG CHILL” warning, which may be issued by TATY in the days ahead.
Screenshots-1189 (above) and 1190 (below) are of the S&P-500 eMini futures contract and the S&P-500 cash index, respectively. The upper and lower dashed horizontal lines are obvious chart resistance zones, where rallies in the price have been rejected previously. Depending upon the speed at which any negative divergences in our supply and demand indicators develop to the rising price, the upper resistance zones appear to be much less vulnerable to being breached by the price rally than the lower chart resistance zones.
Screenshot-1191 (below) has been shown many times with explanations, so here it is updated through Thursday’s close for your additional information and perspective. The Fibonacci projections off the March 9, 2009 and March 23, 2020 lows have been acting as support and resistance zones for the price ever since the beginning of the bear market, and history suggests that is likely to continue. Once the current countertrend rally is complete, then a strong decline will likely begin and possibly accelerate. The crudely drawn in dashed white lines represent a possible path the reinvigorated bear decline may take, but other paths are also valid, so the one shown in this update is for illustrative purposes only and not intended to be definitive.