THE BOTTOM LINE
The low to date for the bear market dating to the all-time high at S&P-500 4818 on January 4-5th is S&P-500 3491.58 on October 13th from which a countertrend rally emerged out of very oversold conditions. Those oversold conditions will likely take days, and/or weeks to unwind and then allow for the resumption of the next leg down in the developing bear market. This update has given some guidance about what to look for in determining when the relief rally may yield to the next leg down in this bear market.
If the countertrend rally turns complex, then the rally is likely to last weeks as opposed to days, if it does not morph into a complex structure. In either case, the next round of sell signals may also be harbingers of an acceleration lower in the popular stock indexes. Investor should expect elevated volatility and violent price swings, both up and down, until the classic signs of a major bear market bottom emerge from the chaos, which often accompany major stock market bottoms.
TRACKING THE BOUNCING BEAR
The stock market arrived at S&P-500 3491.58, its lowest low of the bear market to date, on October 13th during very oversold conditions. A countertrend relief rally has been in operation since that low, which will likely eventually relieve the oversold conditions facilitating a potential return to the primary trend, which is down, because the classic signs of a bear market bottom have yet to appear. The strong up day on Friday brought the price closer to chart resistance surrounding the S&P-500 3800 level.
The countertrend rally could end at any time, but corrective rallies can turn into complex structures and chew up lots of time as they do, so the drill for the days, possibly weeks ahead will be to look for signs the rally may be weakening into a terminus. On the cusp of being eleven months into this bear market process, one should not be surprised to see some acceleration lower, if the low to date for the bear market at S&P-500 3491.58 is violated on a closing basis. I am suspicious that the formation of another lower high near the S&P-500 3800 resistance level may trigger the frustration that has been building up in the “buy the dips” crowd, which have growing losses on all their purchases since the all-time S&P-500 high on January 4-5th at 4818.
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 and finished the week still in the caution zone at 122. TATY has turned up with the rallying price but remains below its magenta down sloping resistance line, and a long way from the red zone surrounding the 140 level. TATY’s Premium/Discount indicator in the lower panel has also turned higher and has breached its down sloping magenta resistance line. A TATY rally failure in, or near the red zone surrounding the 140 level would flash another “BIG CHILL” warning. The last three of which have called the all-time high, and the two previous bear market countertrend tops as they were forming. So, the issuance of another “BIG CHILL” warning would be important this deep into the development of this ongoing bear market, because it may become the trigger for an acceleration lower.
TATY did NOT positively diverge with the price before this rally began, and since TATY is a strategic supply and demand indicator the implication is the current rally may be more anemic and shorter lived than rallies born of multi-week positive divergences in TATY. If TATY rolls over well short of the red zone surrounding the 140 level, then that would grade out as more than normal weakness for rebound rallies and imply a larger probability for the onset of some acceleration lower in the price.
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 did manage to form a flat bottom divergence (not drawn on the chart) in advance of the countertrend rally and has rallied higher with the price. The drill now is to monitor SAMMY for signs of exhaustion in the days, possibly weeks ahead, which would confirm a new TATY “BIG CHILL” warning if one develops. If the countertrend rally avoids turning complex, then this countertrend rally may expire in a matter of days, if the rally turns complex then the rally may last past the November election.
SAMMY — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
SAMMY did its job and gave us a nice multi-day positive divergence (dashed green up sloping line) prior to Friday’s big rally as the price was lagging the positive divergence. The drill now is to see if SAMMY can generate enough strength to rally above its dashed magenta down sloping resistance line. A rally above the resistance line would imply a countertrend rally possibly lasting weeks, and a failure at, or below the resistance line would imply the rally may expire in a few more days. In the best of all possible worlds situation SAMMY develops a big negative divergence as the rally approaches its terminus.
Screenshot-1023 (above) shows the S&P-500 eMini futures contract with a horizontal dashed magenta line drawn near the 3800-resistance level. A breach of this level on a closing basis would suggest a more complex and longer developing countertrend rally underway. A struggle to go higher ending in a failure to rally above this level would suggest an imminent resumption and possible acceleration lower of the bear decline.
Screenshot-1024 (above) shows the S&P-500 cash index approaching its dashed magenta resistance line. A close above this line would imply remaining strength in the countertrend rally, possibly enough to turn the rally into a complex structure lasting weeks as opposed to days.
Screenshots-1025 (above) and 1026 (below) have been shown multiple times in these weekly updates and are updated here through Friday’s close for your additional information and perspective. Screenshot-1025 is in weekly format and shows two Fibonacci grid projections using a common top at S&P-500 4818 but different bottoms, namely the March 23, 2020 S&P-500 low at 2190 and the March 9, 2009 low at the S&P-500 biblical number of 666. The color coding is the same for both: red 38%, yellow 50% and green 62%. The weekly chart has solid Fibonacci lines, and the quarterly has dashed projection lines.
If S&P-500 2190 is not breached on a closing basis, then we will treat this bear market as a run of the mill correction of the bull leg up from S&P-500 2190 to the all-time high at S&P-500 4818 to be followed by the resumption of the great bull market. However, if S&P-500 2190 is breached on a closing basis, then the Fibonacci projections and horizontal rectangles representing support zones formed by the price during the long bull run to the S&P-500 all-time high at 4818, as shown on the quarterly chart in Screenshot-1026, will become operative with very serious implications for the economy, social and political unrest, and geopolitical chaos.
