THE BOTTOM LINE
Weakness in both strategic and tactical indicators imply an assault by the bears on the S&P-500 3200 level, perhaps after a brief relief rally to relieve some oversold indicators. However, unless evidence of re-surging demand arrives during any rally attempt, investors should be aware that another assault by the bears on support at 3200 basis the S&P-500 remains a significant probability. In like manner, a breach of S&P-500 3200 on a closing basis may open the door for an acceleration lower in the price. In either case, investors should expect the recent increase in volatility to continue, until the multiple uncertainties surrounding the election, the election aftermath, and the behavior of global competitors and/or potential adversaries are resolved and discounted by the stock market.
Investors should also be warned that the pending election will not immediately lead to resolution of the daunting problems facing this country at home and abroad regardless of which party’s candidates prevail. Our nation, our corporations, our institutions and individuals have gorged on debt, and if the decades long decline in rates is reversing, or has reversed, then for the overleveraged the weeks and months ahead will likely have the potential to be an existential struggle for continuing financial viability. And, unfortunately this is only one of many challenges to be overcome by the powers that will be post the election.
Bears Land a Couple Blows
Several times in recent weeks the bears have managed to spike the price lower sharply only to then fail to breach significant support zones. And, failing to take out support, the stock market then resumed it’s relentless rally higher in fits and jerks, even in the face of gross over valuation, and extreme bullish sentiment rare experienced. So, will it be different this time now that the bears are making an effort to wrestle control of the market back from the bulls, which have recently failed in their own attempt at achieving new all-time highs?
This past week the bears scored some points against the bulls in the never ending ying-yang contest for which force will control the stock market, but no decisive knock out was scored. The Dow’s September low was breached this past week, but alas the decline in the S&P-500 was repelled just above the 3200 September 24 low. So, once again the bears have expended much effort to take the price below an important support, but have failed to score the decisive knock out, which may trigger a more serious correction, or new bear market. The burden of proof recently has been upon the bulls to achieve new all-time highs, but the bulls failed, and now the burden of proof falls again upon the bears to prove they are taking over the forces of supply and demand. However, as we have been warning for some weeks, volatility has increased, and is likely to increase even more in the days immediately ahead regardless of the trend in the price.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in yellow with the S&P-500 overlaid in red and blue candle chart format.
TATY finished the week at an oversold 101 level, which in more normal times would likely be a zone to watch for the formation a price bottom, but the behavior of a series of indicators has not been normal since the February then all-time high. The yawning negative divergence in TATY dating to before the February high has now resulted in a sharp decline, which has driven TATY below its June and August lows after failing to confirm the September 2-3 all-time high. And, the premium/discount indicator in the lower TATY chart panel has now plunged into the red zone surrounding minus eight, an oversold level. TATY has been warning for weeks that the rally off the March 23 low may not be all it seems, and it may even be a trap for those buying into the euphoria as the price touched new highs.
The growing weakness in the TATY indicator may be a warning that the support under the price rally may be more fragile than the elevated level of the price may tend to suggest. In any case, TATY is likely warning that the stock market’s ability to absorb any unpleasant surprises may be limited, and/or any increase in uncertainty may have a dispropionate adverse impact on the price. If TATY continues to decline, and the premium/discount indicator in the lower panel continues to weaken, then it would seem likely the price may follow, and possibly accelerate lower, especially if the price support at S&P-500 3200 is breached by a significant margin on a closing basis.
However, there is a minor positive developing in the SAMMY family of tactical indicators, so please read on.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown in Screenshot-172 (above) in daily format with the S&P-500 overlaid in red and blue candle chart representation, and in Screenshot-170 (below) in weekly format. SAMMY developed a big negative divergence to the price as the S&P-500 approached the September 2-3 all-time highs, which warned investors to not follow the euphoric bulls into buying that fat price top. The negative divergence is shown by the down sloping dashed magenta line. These kinds of warnings do not always develop as dramatically as shown in Screenshot-172, but when they do they cry out to be heeded, even though the environment may be one of giddy euphoria.
The daily SAMMY chart finished the week with the price near it’s low for the budding decline from the September 2-3 high, but with SAMMY attempting to develop a positive divergence to the price. Although a very minor development at this point, the attempt to positively diverge with the price implies that the bears may have spent a good bit of their fury without scoring a knockout, since the 3200 support has so far not been breached. This begs the question of whether the bears have once again become impotent at a critical support level, or do they just need a brief respite before trying to force the price to resume the decline lower in an impulsive fashion, which is powerful enough to breach the key support at 3200. For the time being the continuing atrophy in the TATY indicator suggests the bears may be growing stronger than on their previous excursions lower. Lacking the arrival of evidence of resurging demand, I am going to treat this situation as a developing setup for a relief rally, which will likely give way to another assault by the bears on the 3200 support level.
Investors need to be alert for a close below S&P-500 3200, because given the weakness being measured by TATY, any close below 3200 may result in an acceleration in the price decline. On the contrary, the arrival of evidence of re-surging demand may result in another attempt by the bulls to take the price higher, and possibly result in an assault on new all-time highs.
Please stay safe!