THE BOTTOM LINE
A series of tests appear to lie immediately ahead for the continuation of the bear market, or new evidence that the bear market may have formed a non-classic bear bottom from which a new bull leg up may emerge. The odds on the latter are not favorable, powerful countertrend rallies to the contrary notwithstanding. I am suspicious the resolution of this conundrum may happen before Valentine’s Day.
When the Bear rests
Today I want to review some stock market history and explore what it may mean for us, as this slow-moving bear market grinds its way lower. From 1966 to August 1982 the Dow was range bound between Dow 500 and 999 making successive round trips between the two extremes. Then in August 1982 the advance/decline line exploded as a new bull market blasted off. Prices were marked up dramatically and quickly as the emerging bull leg gained momentum, which continued until the summer of 1987 and was finally reversed by the historic October 19th crash, when the major stock indexes crashed almost 25% in a matter of hours.
Investors tend to project the recent past into the future during bull markets, which creates a psychological self-reinforcement mechanism, as pull backs seem to be endlessly brief and shallow. However, this plodding higher is often in sharp contrast to the exploding prices experienced during the period when investors pile into perceived bargains in the belief that the bear market is/has ended.
Financial institutions have become conditioned to treat pauses in bear markets as a potential replay of that historic blast off in August 1987, which in part potentially explains the powerful bear market rallies in the price as competitive forces cause institutions to want to be first into the perceived new bull market. Alas, that strategy does work well, when bear markets actually end, but currently the weight of the evidence in terms of the classic signs of exhausted sellers and resurging demand does not yet favor the emergence of a new bull leg up, or a new bull market. So, the strategy of beating the competition into equities carries some substantial risks, if the bear market has not expired, which is likely the case.
I suspect the recent multi-day meandering rally may be on the cusp of ending if it does not develop the power to accelerate higher soon. Failure to manifest this acceleration higher would imply yet another test of S&P-500 support at 3800 possibly before Valentine’s day. A breach of S&P-500 3800 would likely open the door to a test of new bear market lows in the major stock indexes, a path already taken by the bear market leading NASDAQ.
TATY — A REPRESENTATIVE OF 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. TATY managed to end the week marginally in the red zone surrounding the 140 level, where it has been repeatedly rejected since the bear market began a year ago on January 5th, 2022. If a new bull leg is emerging without having posted the classic signs of a bear market bottom having formed, then TATY will continue to gain strength eventually beginning to form bottoms in the red zone and tops approaching the blue zone surrounding the 160 level. However, lacking the classic signs of a bear market bottom having formed, this outcome does not enjoy favorable odds.
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 is shown overlaid in red and green candle chart format. SAMMY has touched a new high, which is exhibiting some gravitational like pull higher on the price. The new high in SAMMY suggests the rally in the price may linger for a while.
STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS WHICH ARE UNDERGOING TESTING
STERLING is shown above in candle chart format in the upper panel with the S&P-500 eMini futures contract in the lower panel. STERLING is gaining a reputation for diverging 3-5 days in advance of price moves, up or down. Friday’s sharp move higher in the price was preceded for six days by a positive divergence in STERLING (green dashed up sloping line). The rally in the price has reached some chart resistance, so while the rally may linger for a while, any developing negative divergence in STERLING should not be ignored, as it may be a harbinger of another test of S&P-500 3800. A breach of S&P-500 3800 would significantly increase the odds of an assault on new bear market lows in the major stock indexes.
Screenshots-1121 (above) and 1122 (below) show the S&P-500 eMini futures and cash indexes, respectively. Horizontal dashed lines on both charts represent resistance levels for the price. Screenshot-1122 is particularly of interest, as the rally in the price is now approaching significant resistance at the horizontal red dashed line. If the price is rejected at this resistance level, then a renewed assault on S&P-500 3800 may happen quicky, and if support at that level is breached then an assault on new lows for the bear market would likely follow, perhaps quickly.
Screenshot-1123 (below) has been shown many times and is updated here for your additional information and perspective. Please notice the clear pattern of lower lows and lower highs since the beginning of the bear market on January 5th of last year. This is the classic definition of a bear market, and if double Fibonacci support at S&P-500 3800 is breached, the price is likely to test support at the October low for the bear market just below S&P-500 3500. The development of a new low in the price would likely open the door for an acceleration lower.