THE BOTTOM LINE
These weekly updates have admonished investors to expect the S&P-500 to “wobble” to new all-time highs, which happened twice this past week. Investors should expect more of the same, as new all-time highs will likely be followed by sharp declines, and perhaps rising volatility. However, rising bottoms now in place with both the TATY and SAMMY indicators suggests some potential for an acceleration higher in the pace of the rally. At the moment this is a lower probability, but a probability worth mentioning, subject to a breakout higher in the S&P-500, which is also confirmed by breakouts higher in TATY and SAMMY. The stock market has demonstrated an ability to move higher in the face of a “wall of worry”, even of the most deadly and tragic kind in Afghanistan.
Continuing the Ascent
These weekly updates have been advising clients that blunt analytical tools like sentiment readings, and valuation, may have some value as secondary considerations, but the Law of Supply and Demand always is the only absolute in market analysis, in any market, not just the stock market.
Fortunately, the stock market has a very long history not only in this country, but in the United Kingdom, and a few other countries as well, which means there is a vast store of data available for analysis, and by implication historical comparison. We have admonished investors that the metrics of supply and demand remain favorable to being invested, even in the face of a rising chorus of bears proclaiming the death of the great liquidity driven bull run, due to a variety of reasons from overly bullish sentiment, obscene historic over-valuation, a Kondratiev Wave wipeout down leg, the imminent collapse of the dollar, the global rise of authoritarian rule, and on and on it goes.
With bears coming out of the wood work, and the tragic images of chaos and death as America’s longest war is finally ending in Afghanistan, the stock market made a couple of new all-time highs, as an on going testament to the power of excess global liquidity seeking a home to float equity prices higher. And, by the close on Friday there was a tiny hint that the rally may have some potential to begin to accelerate higher. This circumstance could become a testament to the stock market cliché that “bull markets climb a wall of worry”. The only prediction we are willing to make is that the market will obey the Law of Supply and Demand regardless of the noise and the bad news surrounding it.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow in Snapshot-290 with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at a strong 149, which is much improved over recent readings.
Sharp eyed investors will also note that TATY has now painted out a series of rising bottoms, the first hint that demand may be gaining ground on supply, which bodes well for the prospects of more new all-time highs. If TATY begins to paint out oscillating lows in the red zone surrounding the 140 level, and highs near the blue zone surrounding the 160 level, then that would be objective market generated evidence of gathering strength in demand over supply, which would suggest the potential for an acceleration in new all-time highs, in the absence of any “Big Chill” warning in the interim.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-277 in yellow with the S&P-500 overlaid in red and blue candle chart format. SAMMY had a good week, and while the negative divergences often mentioned in these weekly updates remain (down sloping dashed lines), there is also a very positive change worth noting, which like the rising bottoms in TATY, suggest some tiny potential for an acceleration higher in the price.
SAMMY finished the week near its recent rally high, and above its long standing orange dashed negative divergence line. And, in doing so it failed to violate support at the horizontal yellow dashed line during the recent price weakness. SAMMY has now painted out a series of rising bottoms denoted on the chart by the upsloping green dashed line. This implies an inability of the bears to take charge of the balance of supply and demand, when the price has become under pressure. And, the rally back almost to a new high from the March 2020 low suggests growing strength in demand under the surface. Yes, these are minor considerations at the moment, but a hint that the usual negative seasonal influences of September and October may be a bit muted this time around. Too soon to make much of this, but it is what it is, and the market painted this picture and not I, which makes it notable.
Screenshot-275 is of the S&P-500 with boundary lines above, and below, connecting the recent highs and lows respectively. If the rising bottoms in TATY and SAMMY are to have any real significance, then the S&P-500 will need to spike above the upper boundary line. If, coincidentally TATY and SAMMY both surge higher, then the negative seasonal tendencies of September and October may have already occurred, and the bears may be on the cusp of some very uncomfortable days ahead.
On the contrary, a failure of the S&P-500 to breach the upper boundary coincidentally with confirming weakness in TATY and SAMMY would imply the potential for the previous setup of a wobble higher interspersed with sharp, but likely shallow declines, which is the more probable outcome. However, even though it is a lower probability that the S&P-500 will spike above its upper boundary, those rising bottoms in TATY and SAMMY would make me very uncomfortable, if I were a bear and short the stock market.
Screenshot-276 shows the S&P eMini futures contact for a bit of greater perspective. However, Screenshot-278 is an interesting example of a new family of tactical indicators currently under going testing after over 900 tweaks and upgrades to the formula, and control parameters. A brief overview follows in the next section.
THIS WORK NEVER ENDS — STERLING
A quest, which began decades ago, seems to never end.
Once upon a time, I set out to design a futures trading indicator for a trader, which was a consistent loser at trading. I’d met him at a seminar, and he knew I was developing indicators for my own use. His real problem was a lack of trading discipline, so what I designed for him rotated around making it easier for him to hold to a discipline. Like most indicators it had a winning probability at locating tradable bottoms, as fear tends to be the friend of traders looking to be long the market, but then there was that eternal dilemma of where to sell longs. He eventually learned to make better entries, and then to make staggered exits from his longs while they were profitable. This eventually got him to a breakeven to marginally profitable trader, no small task using 50:1 futures leverage, so he thankfully decided to go back to being a tax attorney.
Tops, minor or major, are extremely difficult challenges for indicator developers, especially in this age of new derivatives becoming available almost daily. NYSE data is still King, and usually reliable, but more and more risks are being managed by derivatives, which NYSE data does not include. Also, derivatives are a much faster game than the data derived from the NYSE, because many derivatives utilize leverage in their algorithms. So, the difficult task of identifying tops under construction, minor or major, has become even more challenging. Consequently, the quest to develop a reliable top indicator for a would be trader decades ago continues, even after developing and testing literally countless prototypes down through the years.
STERLING is a new family of indicators, which show some promise of finding tradable bottoms with a high degree of statistical reliability, and more importantly tops as well. Screenshot-278 shows one of a few dozen variations of the basic STERLING prototype formula, which are currently being tested in real time. A Harvard Ph. D friend of mine had an influence on how I constructed this indicator family, although she was applying the notion in a totally different academic discipline. In Screenshot-278 STERLING is in the top panel, and the price is in the lower. Sharp eyed investors will notice that when STERLING “flings” the “whole body” of a candle below the lower Bollinger Band there is a high probability of a tradable bottom being close at hand. However, the most important thing about STERLING happens when impulse moves higher, or rallies are in the process of giving out of gas.
The down sloping magenta dashed lines on the STERLING chart have been consistent in their ability to scream “time to cash out” of this impulse movement higher. Not all the remaining dozens of these STERLING prototypes show this kind of dramatic negative divergence, but remarkably all tend to clearly paint the bottoms. An elimination process is now underway to carefully pare down the remaining surviving candidates of this new family of supply and demand indicators, which unlike Lowry Research indicators also include modules for derivative representation.
The survivors of the testing period will by definition be the best of the best derived from this family of tactical indicators. And, hopefully confirm an indicator reasonably effective at finally locating both tradable bottoms together with profitable exits in one indicator. Almost all the best indicators I’ve ever encountered have the ability to reliably find bottoms, but few to none have enviable records at locating tops, or exits from longs. This is because tops and bottoms are the product of entirely different processes.
So far STERLING prototypes have been tested back to the February and September tops, where they painted negative divergences, and now the testing will continue over an expanding sample. If the early results continue, especially if the market becomes violent, then all the better for our clients down the road. If in testing STERLING fails, then that would be a surprise, but one to be expected in this kind of work, where the stock market does not easily yield its secrets.
STERLING is also the name of my third grandson, a rambunctious toddler these days according to my daughter, which also seemed an appropriate name for a family of indicators designed to track the never ending rocking and rolling of the stock market.
Please stay safe!