THE BOTTOM LINE
The recent failure to breach the S&P-500 February low at 4114 has resulted in a likely powerful countertrend rally, which is demonstrating enough energy for it to linger for a while before decelerating into a stalling out at some yet to be determined level, but likely below new all-time highs, a powerful rally phenomenon that is often associated with bear market rallies. The process of approaching and then being turned back at indicator and price resistance levels is often a time consuming one, which implies that the current top under construction may eventually resemble the months long topping processes associated with the 2000 and 2007 tops (Snapshot 308 and 309 both below).
Unless the weight of the evidence changes, investors should continue to expect volatile and/or violent price movements both up and down in the stock market. If the February low at S&P-500 4114 was the end of the 15% correction, then we will go back on offense in portfolios when the weight of the evidence turns in favor of demand over supply.
TOPS ARE A CLIMB AND BOTTOMS ARE A SLIDE
The stock market is proving once again that “tops are a climbing process and bottoms are a sliding event”. Last week’s update observed that the weight of the evidence favored a major top under construction and observed that the powerful and persistent rally arising out of the successful test of the February bottom opened the possibility that the current top under construction may eventually resolve into something like the time-consuming months long 2000 and 2007 tops. That observation appears to be an even better probability after this week’s crossing of the Lowry Research buying power index back above the selling pressure index, especially in the absence of any 90%, or back-to-back 80% upside, or downside days since the January 4th all-time high. The stock market really is a master of disguise!
TATY — A RERESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
After previously taking a trip into and below the caution zone surrounding the 115-125 level, TATY finished the week at 137 on the cusp of the red zone surrounding the 140 level, as the price approached a previous rebound level. This will likely set up some resistance to the rally both in terms of the price and the indicator, which will likely begin to restrain and dampen the velocity of the recovery rally.
Deceleration in rallies tends to be time consuming, and the breakout above the magenta negative down sloping divergence line in the Premium/Discount lower panel of the indicator implies possibly weeks before the rally stalls out once again at a yet to be determined level. If this turns out to be the case, then the topping process will have simply marked time until the bond market (rising interest rates) catches up to provide a more attractive alternative home for the cash leaving equity allocations previously weighted heavily in favor of equities, which have likely been under pressure recently as the stock market anticipated rising rates.
While the probabilities are not favorable, a TATY rally above the magenta down sloping negative divergence line and above the red zone surrounding the 140-level followed by oscillating bottoms in, or near the red zone would tend to confirm the correction ended in February at S&P-500 4114 and a new leg up in the great bull market began. At this point the weight of the evidence does not favor this option over a long-drawn-out topping process like the 2000 or 2007 tops (Snapshot-308 and 309 shown at the very top in the bottom line), which meandered for months in a range, while TATY continued to erode and fall lower.
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 blue candle chart format. After positively diverging with the declining price foreshadowing the current rally, SAMMY is rallying with the price back toward the magenta down sloping negative divergence line, which will likely become resistance as SAMMY approaches it. Like the condition of TATY, SAMMY is implying the velocity of the rally is likely to slow, and it may be days, or weeks before the energy in the indicators and the price dissipates enough for the indicators and the price to stall out at yet to be determined levels.
SAMMY is basically confirming what TATY is telling us, which is failure to breach S&P-500 4100 on a closing basis has resulted in a countertrend rally like those contained in the meandering rallies in the 2000 and 2007 tops, which lasted for weeks before those bear markets eventually descended into swift and violent wealth destruction.
STERLING — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above with the S&P-500 eMini futures in the lower panel. STERLING is doing what it does best, which is painting out negative divergences at short to intermediate tops and positive divergences with an “island(s)” at short to intermediate bottoms. The last up sloping green divergence line on the chart demonstrates how STERLING foreshadowed the current powerful rally. Please note that STERLING is currently accelerating higher, which implies that the price will follow until STERLING paints out a negative divergence. STERLING divergences usually take five days plus or minus, so the implication is the rally still has gas in the tank.
TATY, SAMMY and STERLING are all suggesting that the current likely countertrend rally is not done, which supports the growing evidence that the process of building out a major top compatible in “degree” with the likely expired great bull market has more work to do, possibly weeks more, if this major top follows the examples of 2000 or 2007.
Screenshot-710 and 711 (both shown below) are the S&P-500 eMini daily futures and weekly cash index respectively for your additional perspective.
