THE BOTTOM LINE
A cohort of usually reliable supply and demand indicators have not yet begun to negatively diverge with the ongoing countertrend rally resulting in rising “animal spirits” and the urge to speculate especially regarding the NASDAQ. This phenomenon often appears toward the end of countertrend rallies early in bear markets, which implies in the current case that investors are likely in the midst of a “large” degree bear market more than a year after the January 5, 2022 all-time S&P-500 high at 4818. Given the lack of negative divergences, then the price rally will likely attempt to assault overhead resistance levels and perhaps stretch into February before the development of any consequential negative divergencies in our proprietary supply and demand indicators.
WHERE HAVE ALL THE DIVERGENCES GONE?
Here is a quote from last week’s “BOTTOM LINE”, which continues to be valid: “The stock market in its role as master of disguise and deceit continues to frustrate bulls and bears alike with a slow moving, twisting, and turning, and overlapping countertrend rally, which appears according to a cohort of supply and demand-based indicators to have enough residual strength to linger perhaps into February before any meaningful resolution. For the time being the odds remain favorable that the meandering rally is a countertrend rally in an ongoing bear market. While the rally is not required to produce negative divergences in a cohort of indicators, the odds are favorable that the rally will linger until negative divergences do begin to appear, hopefully below S&P-500 4100.96”.
The overlapping, meandering and time-consuming rally has continued and by Friday’s close was only a few points below the December 13th S&P-500 rebound high at 4100.96. Although lacking the characteristics of an impulsive bull type movement, the countertrend rally has performed well in its role of master of disguise and deceit, which has triggered a return to “animal spirits” and the urge to speculate, especially regarding the NASDAQ, the bear market leader. This is a common bear market phenomenon during early rebound rallies, when optimism and “animal spirits” return to levels prevalent at, or sometimes even more than levels attained at the previous bull market peak. The bear market is now over a year in development and to see the return this many months on from the all-time high also suggests the existence of a large “degree” bear market, suggestive but at this point not definitive.
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. TATY finished the week marginally lower at 142 but still in the red zone surrounding the 140 level.
The red zone tends to be strong resistance for bear market rallies and therefor a zone where bear market rallies tend go to die, sometimes over a period of weeks. If a stealth bear market bottom has occurred without the usual signs of exhausted sellers followed in short order by measurable signs of resurging demand, then instead of TATY failing at the red zone this very reliable indicator will continue to rally forming bottoms in, or near the red zone and tops in, or near the blue zone surrounding the 160 level. This result is not expected but does represent one of the few definitive ways to confirm the existence of a stealth bear market bottom followed by the emergence of a new bull leg up in an ongoing Great Bull market.
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. Increasing strength in SAMMY tipped us off that the countertrend rally was likely to continue, because it was the first supply and demand indicator to accelerate higher as the price was approaching resistance. So far, SAMMY has failed to paint out any negative divergence with the rising price, which implies the rally in the price is likely to attempt an assault on resistance at S&P-500 4100.96 and if SAMMY still fails to produce a negative divergence, then the price may continue even higher.
STERLING — A REPRESENTATIVE OF A FAMILY OF NEW SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above in the upper panel with the S&P-500 eMini futures contract in the lower panel. STERLING has a superb history of diverging with the price both up and down, usually for 3-5 days, before the price follows STERLING higher or lower. There have been few STERLING signals lately, and currently there is no divergence with the rising price, which implies the price rally likely has more work to do.
Screenshot-1136 (above) and 1137 (below) are the S&P-500 cash index and eMini futures contract, respectively. Both charts show dashed horizontal lines representing previous chart resistance to any further rally in the price. It is likely that the lower resistance on both charts will be assaulted soon given the lack of any negative divergences in a cohort of usually reliable supply and demand indicators. Given that it usually takes 3-5 days for divergences to form, then this implies that it may be early February before there are any signs the price rally may be expiring, which would accommodate those waiting on the Fed, which meets on Wednesday of next week.
Screenshot-1138 (below) has been shown many times and is updated here through Friday’s close for your additional information and perspective. Screenshot-1138 shows with horizontal blue boxes support zones created by price action during the long rally into the January 5, 2022 all-time S&P-500 high at 4818, and Fibonacci support levels derived from two different important lows, the March 9, 2009 low at 666 and the March 23, 2020 low at 2190. The chart also shows a rough representation with dashed white lines a possible path for the bear market to unfold, although there are others equally valid ways for the bear to go about its business. This rough drawing is for illustrative purposes only and is not intended to be definitive. In this example the bear market decline does not violate S&P-500 2190, which implies a new leg up in an ongoing Great Bull market would follow.
However, a violation of S&P-500 2190 on a closing basis would tend to confirm the existence of large “degree” bear market since the all-time high at S&P-500 4818 with serious implications for global chaos socially, economically, financially, politically and geopolitically, as global systems would come under huge stresses and great stresses and strains tend to ferret out here to fore unknown weaknesses, which then tend to fail spontaneously “out of the blue”, possibly in a cascading manner. Clients need to know we are confident that our proprietary supply and demand indicators combined with our experience will allow us to successfully navigate the risks represented by such an extreme and chaotic environment. Fortunately, unless S&P-500 2190 is violated on a closing basis this warning is just an academic exercise, but as some of you may have noticed we are living in a post-truth world attendant with all that may imply.