The interim update published previously alerted investors that the recent mild correction may be nearing an end given the growing positive divergences being registered by both strategic and tactical supply and demand indicators. And, the issuance of a tactical buy signal by the SAMMY family of indicators. The update turned out to be extremely accurate, as the stock market proceeded to rally sharply for the balance of the week. By Friday’s close the first signs of some selling appeared as the S&P-500, and our preferred VOO ETF, had rallied back to marginally exceed the resistance at the 62% retracement level, which is also in the zone where the preceding rebound rally failed after the initial leg down in the correction. Having done some buying during the weakness, and having diagnosed the bottom correctly, what is the strategy and tactics for the days and weeks ahead?
TATY — A STRATEGIC FAMILY OF SUPPLY AND DEMAND INDICATORS
TATY is shown in the first chart above in yellow with the S&P-500 overlaid in red and blue candle format. During the recent weakness in the price, the Dow gyrated hundreds of points intraday almost every day, as the volatility we had been warning clients about roiled the market. However, as the price went through its violent gymnastics, TATY consistently stripped away the daily noise, and continued to suggest to investors that the big picture strategic view remained favorable. I must admit that given the velocity of some of the Dow moves, I was a bit surprised that TATY only declined marginally, and then bottomed in the red zone, which historically is a sign of strength consistent with a continuing bull trend.
The failure of the violent price moves to drive the premium/discount indicator, found in the bottom panel of the TATY chart, deeply into the discount to “value” zone is a concern, as the strongest bottoms often form, when the discount is forced below the minus eight level. Discounts below minus eight tend to signal that most would be sellers have been driven from the market, and the strong hands (deep pockets) are seizing control. The sharp rally of this past few days is evidence that buyers have seized control of the market, but the shallow discount to value makes me want to watch this indicator carefully now that the price has recovered back to an obvious math and chart resistance level. The implication is the rally may begin to struggle, and need to digest its gains before a renewed assault on new all-time highs. On the contrary, the shallow discount may have left enough would be sellers waiting at resistance to roll the rally over into a test of the recent low, which may actually be a positive development for investors with excess cash.
The second chart above shows an updated view of the daily chart of the VOO ETF, which was shown in the interim update. The rally has been quite persistent, and has now exceeded the math resistance at the VOO 263-4 level mentioned in the update. However, resistance is still evident just a bit higher, where the rebound rally failed previously. Also, please note how the strong positive divergence (bold green line) suggested the price would follow higher, and it has.
SAMMY — A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in the third and last chart. The third chart shows SAMMY alone with the recent buy signal shown with a vertical blue line. Since we had already deployed some cash earlier during the correction, I elected to play the odds, and try to do another purchase on our terms on a retest of the low after SAMMY issued the buy signal mentioned in the update. Usually the initial rebound off a low will be tested in a matter of a few days, but unfortunately this time the rally turned out to be so strong it did not look back. However, the price has now reached both math and chart resistance, and only an exceptionally strong rally would likely take out the resistance, and then immediately assault new all-time highs without at least a brief digestion of gains, or even an outright test of the previous low. If the market dials up a pullback, then we shall attempt to take advantage of it for clients with excess cash.
THE BOTTOM LINE
A leg down, or possibly the entire correction, has ended and given way to a strong rally, which has now reached an important zone of resistance. Strategic supply and demand indicators are signaling a continuing favorable balance of demand relative to supply, which implies a renewed assault on new all-time highs, perhaps after a respite to digest the sharp gains of the past week. Given the positive strategic metrics, we shall attempt to add some VOO to accounts with excess cash, if given a relatively low risk trade entry on a digestion of gains pause, or an outright retest of the recent low. A decision to execute a purchase of VOO will be confirmed only to clients and research customers by text or email. Please note that most clients are already invested, but some do have new cash, which needs to be put to work.
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