PLEASE NOTE THAT TODAY’S UPDATE DEALS WITH FIBONACCI RELATIONSHIPS AT WORK AT PROGRESSIVELY SMALLER TIME INTERVALS. FOR EXAMPLE SNAPSHOT-353 AND SCREENSHOT 121 ARE BOTH IN WEEKLY FORMAT. SCREENSHOT 120 IS IN DAILY, AND SCREENSHOT 119 IS IN 39 MINUTE.
The stock market is a master of disguise in its role of confusing most investors most of the time. However, the process involved in price discovery must leave tracks, and for those with the proper training, and patience, those tracks can be discovered and followed. The current tracks being left by the market implies the clock may be running out on the market’s ability disguise its intentions much longer. Late or soon, a decision with substantial implications for wealth building, or wealth preservation will be forth coming.
The rally in the S&P-500 off the March 23 low began to stall as it approached the Fibonacci 62% retracement level (Screenshot 121). Once that level was touched the stock market encountered a brief and shallow dip, which was followed by another probe of the 62% level, where the rally stalled again over a three day period. Then last week the behavior of the rally gave way to persistent weakness during which several minor support levels were violated (Screenshot 120). The decline eventually penetrated the important S&P-500 2800 level intraday, but not on a closing basis.
Screenshot 120 shows the rally off the March 23 low to its expiration at the 62% retracement level, and then its subsequent decline to the 25% retracement level of the rally from the March low. On Thursday the market opened lower and then painted a low right at the 25% retracement level of the likely counter-trend rally from the March low. This decline found buyers in size at the 25% retracement level surrounding 2766- 2769, and by Friday the rally had carried the S&P-500 back above the important 2800 level mentioned in the Interim Update. Failure to close below S&P-500 2800 leaves open the question of whether the post March 23 rally is complete.
Screenshot 119 shows the decline from the high of the test of the recovery rally on May 12 to the Thursday May 14 intraday low, and then the subsequent recovery rally through the close on Friday May 15. Since Fibonacci tends to be operating at all levels of nature, the rally beginning after the Thursday intraday low may run out of gas at one of the levels shown in Screenshot 119. The rally has already attained the 50% level, so the 62% level now becomes a reasonable target for the rally to begin to stall. That level surrounds S&P-500 2877. A rally above 2945 would suggest the rally off the March low still has work to do. At this point in development, and with high levels of bullish sentiment persisting, it is reasonable to expect the bounce off Thursday’s low to fail, and then paint out another lower high for the likely counter-trend rally off the March low. Another lower high would have significant negative implications for the next leg down.
The stock market continues to attempt to disguise its intentions. However, the options available to continue the obfuscation appear to be running out. Investors should remain vigilant for a resolution of the new bull leg to new all-time highs, or developing (large degree?) bear market question. Action on the part of investors are implied by either outcome.
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 format.
TATY turned lower and finished the week at a deeply oversold 116 level. Atypical behavior continues to be evident in this family of indicators, which suggests underlying conditions in the stock market have not returned to normal. Atypical behavior also suggests the rally off the March 23 low may be a trap for those buying into it.
Given the extraordinary nature of the economic displacement, and the continuing outlier nature of objective measurements of the supply and demand balance, we believe caution and preservation of capital remain prudent strategies. If evolving evidence to the contrary arrives, then we will adjust our strategies and tactics to take advantage of the changing circumstances. However, we would expect such positive changes in circumstances would also be confirmed by our strategic and tactical indicators returning to their more normal ranges. Obviously, that is not yet the case with TATY now beginning to show signs of stalling out deep into its oversold zone, an unprecedented outlier of an event for this indicator, which balances with outlier economic numbers regarding spiking unemployment, rescue legislation, and Fed stimulus.
Any further developing weakness in the TATY family of strategic indicators would seem to imply the thesis that a new bull leg up to eventual new all-time highs began on March 23 is likely a false hypothesis.
THE BOTTOM LINE
The stock market appears to be in the process of painting out a series of lower highs after the likely counter-trend rally stalled at the Fibonacci 62% retracement level of the decline from the all-time high to the March 23 low. Should a series of lower highs in the recovery rally give way to another leg down, then that decline may become significant in its power, and potential acceleration lower.
However, should the rally, which began on Thursday May 14 take out first S&P-500 2877, and then 2945, then the rally off the March 23 low would not be complete. The negative consequences of the expiration of the counter-trend rally would then be delayed until the likely counter-trend rally was complete. However, the odds continue to favor a developing bear market over a resumption of the former bull market to new all-time highs, based almost entirely on the Administration, the Congress, and the Fed providing prodigious, and record amounts of economic stimulus in the form of a massive increase of debt on the nation’s balance sheet. A maneuver, which will be extremely vulnerable to increasing nominal interest rates.
Please stay safe!
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