The counter trend rally in the S&P-500 stalled out at 3233 in an environment, which had turned giddy with euphoria, and extreme readings for bullish sentiment. And, the second leg up in the rally came within five S&P points of being a Fibonacci .618 of the first leg up off the March 23 low (Screenshot-131). This relationship is more typical of a rally in a developing bear trend than it is of a new bull trend. Additionally, the spike into the 3233 top left what is known in the trade as an “island” reversal (shown below the ellipse in Screenshot-138), when the price first gapped up on panic like buying, and then gapped down from the recovery high leaving behind an “island”, which is viewed as a bearish development.
In the days that have followed more bearish evidence has begun to appear, as the price declined sharply, but then mounted a rally attempt which managed to fill the gap shown as the ellipse in Screenshot-138 above, but then failed not once but twice to best the 3233 recovery high. This was discussed in last week’s update as a bearish development. Screenshot-135 below shows the second leg up beginning at its 2766 low to the recovery high at 3233 with a Fibonacci grid overlaid to show probable support levels for the decline, which is now underway. The decline to date has walked all over the 50% retracement level at 3000, but has failed so far to breach the 62% retracement level at 2945.
Screenshot-134 below shows the decline from the all-time high at 3233 to the March 23 low at 2191 with a Fibonacci grid overlaid. The recovery rally carried above the 62% retracement level, as the second leg up was painting out its .618 relationship with the first leg (Screenshot-135 above). Please take a look at Screenshot-136 below, which shows that the 62% retracement level at 2933 may still come into play, but this time on the way down, if the recovery rally is complete at the 3233 high to date. This could potentially become a demonstration of the notion that previous resistance becomes support once broken, as the price rally was rejected for three consecutive weeks at this 62% Fibonacci target level before it was finally taken out as the price continued higher to complete its .618 relationship to the first leg up.
Sharp eyed investors will notice that the 2933-2945 level will likely be important, as it a logical level where the bulls and bears may struggle for control of the market going forward. For the time being the weight of the evidence seems to support the case for a developing bear market in progress, but I would be surprised if the bears can cause any acceleration lower until the 2933-2945 level encounters a close below it. And, I would not be surprised to see another rally attempt develop, if the price begins to loiter without breaching the implied support at 2933-2945, especially with the onset of usually slow pre-holiday trading next week.
The bears have regained control of the stock market for the time being, but they must now begin to take out a series of support levels in order to prove that a large degree bear market is under development, which would likely last for months. The 2766 level, where the second leg up in the recovery rally began, looms large as critically important for the bear case. A close below 2766 would likely trigger a recognition among global investors that the bear market did not end at 2191 on March 23, but rather the greatest risks to wealth still lies ahead, because recognition would likely morph into an accelerating global stampede to sell. Bear markets end in panic, and often after a phase of accelerating decline. The first leg down, if we remain in a bear market, clocked in with a 38% decline from the all-time high. So do the math, a second leg down to a lower low implies some potentially very serious wealth destruction, perhaps on the order of that experienced in 2007-2009, or potentially even worse.
A close below first the 2933-2945 level followed by a close below 2766 would substantially increase the already favorable odds that a large degree bear market was beginning to take the next steps in its mission of correcting excesses in the financial system through wealth destruction. On the contrary, should the 2933-2945 level repel the decline, and a rally back above 3233 follows, then the advantage would turn toward favoring the bulls, and that the bear market likely ended at the S&P 2191 March 23 low, and eventually new all-time highs would likely be assaulted during a new leg up in a bull market.
Screenshot-137 puts everything into perspective, albeit the chart is a bit busy, as is the implications of what appears to be coming together to buttress the bear case.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in yellow above with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at an oversold 105, and atypically has never led prices higher since the March 23 low. Additionally, the premium/discount indicator in the lower panel remains below its zero line. This extended abnormal and atypical behavior in this previously extremely accurate family of strategic supply and demand indicators continues to imply the rally off the March 23 has been counter-trend in nature. And, is likely a warning that those buying into the rally may be buying into a trap. It is amazing to me that such a huge rally in the price off the March low never resulted in the TATY indicator returning to its normal operating range. It remains at a depressed and oversold level, which continues to imply that we may be experiencing unprecedented, and ongoing statistical outlier conditions.
THE BOTTOM LINE
For the time being the bears have regained control of the stock market. However, unless critically important support levels identified in this update are breached in a matter of days, perhaps in July at the latest, then the bulls may be able to regain control, if they can take the price above the recovery rally high at S&P-500 3233, the odds of which would not appear favorable given that the most recent tests of that level have failed in the gap shown in Screenshot-138.
Please stay safe, as medical experts continue to warn that this pandemic remains in its early innings, and here in Florida the number of daily reported new cases is spiking higher and setting new records in the process.
DISCLAIMER : Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.