THE BOTTOM LINE
As election uncertainties abate, there is evidence showing up in a series of indicators of renewed, and gathering strength, in the balance of supply and demand. This change in strength has been sufficient to cause some supply and demand indicators to breakout above their previous resistance level, which increases the probabilities toward a renewed assault on new all-time highs. Any additional rally in the price accompanied by, and/or confirmed by, increasing strength in both strategic and tactical supply and demand indicators, would continue to shift the probabilities in favor of new all-time highs, as the calendar turns toward the most favorable seasonal period of the year. Most of the gains in the stock market over the last one hundred plus years have tended to occur roughly in the seasonal period between Halloween and Easter.
For weeks now the stock market has replayed the same setup with the same outcome multiple times. The bears seem to take charge of the stock market by spiking the price lower in dramatic fashion in a volatile environment of uncertainty only to fail to generate enough strength to breach important support zones, where upon the bulls suddenly re-appear, and take charge by driving the price back toward new all-time highs. However, the bulls last rally attempt failed to achieve new all-time highs, and now a follow on rally is up against another test of having sufficient strength to make new all-time highs. A failure to achieve new all-time highs by this current rally would likely open the door to a renewed attempt to test support at S&P-500 3200. If the current rally does result in a failure to achieve new all-time highs, then a case can be made that the failure may likely occur during November, or perhaps before Christmas, if the market choses a more circuitous and time consuming route.
The reality is the stock market has been in a broad trading range ever since the September 2-3 all-time high, and the more recent November S&P-500 eMini high at 3645, and strong support at 3200. With the uncertainties surrounding the election beginning to fade, there has been some evidence of strengthening demand, but also some evidence that supply remains stubborn to decline. And, the good news of a possible highly effective COVID-19 vaccine on the horizon, is being offset by dramatically rising cases and deaths due to the long advertised fall/winter resurgence in infections. And, then there is the distribution challenge represented by the vaccine being required to be kept at near minus one hundred degrees Fahrenheit until given not once but twice weeks apart. So, yes there are diminishing uncertainties, but still enough around to likely keep volatility elevated, as the cold dark days of winter loom on the horizon, even if some of our would be global adversaries do not mis-behave during the presidential transition.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-381 in yellow with the S&P-500 overlaid in red and blue candle chart format.
TATY broke out above its long negative divergence line, and then managed to rally to finish the week at 136, which is just below the red zone beginning at 140. In theory TATY has no upper or lower boundary, and infinity both positive and negative is the ultimate range. However, in recent decades TATY has found a practical limit at just above 160 to just below zero, and it has a long history of tops forming in the price when TATY is in, or near the red zone, which extends from 140 to 144. All significant tops, including rebound tops during bear trends, have tended to stall out when TATY has taken an excursion into the caution zone extending from 115 to 125, and then managed a failing rally back into, or near, the red zone. Sharp eyed investors will notice that TATY appears to be painting out that exact excursion having recently dipped into the caution zone, and now approaching the red zone. If this is a “last hoorah” rally, then TATY will roll over soon in, or near, the red zone as the price makes a last gasp peak.
Healthy bull markets paint out TATY bottoms in, or near, the red zone and peaks near, or just above the 160 level, as the price marches ever higher in fits and jerks. In the current case the odds favor the former over the latter, because the current rally is likely just an leg up in the longest bull run on record. On the contrary, if a new born bull market did begin at the March 23 low, then TATY will likely begin to oscillate forming bottoms in, or near, the red zone and tops near, or above the blue line at the 160 level. However, the weight of the evidence does not favor the new bull market hypothesis, but it cannot be ruled out.
The crash sequence beginning in February of this year has been an exception to the past repetitive topping setup. If the price manages to achieve new all-time highs only to fail as TATY stalls out in the red zone coincidentally with a roll over, and then a decline in price, then this would appear to be a fitting end to the long rally leg from the March 23 low. That sequence remains to be seen, but it is a setup I’m watching for diligently, as it may open the door to a return to the more orthodox market behavior of past decades vis-à-vis TATY, as well as other supply and demand indicators. A return to this more orthodox topping pattern may serve to give us a blueprint for future “outlier” type market behaviors similar to the one we have just experienced beginning at the February high, followed by the record setting plunge to the March 23 low, and then the long and persistent ragged rally back to new all-time highs.
The break out shown in Snapshot-381 above the down sloping magenta negative divergence line implies the stock market may have gathered enough strength to mount an assault on new all-time highs. However, this breakout is happening in an environment, where in more normal times TATY has stalled out in the red zone, rolled over, and put in place a gravity like pull on the price lower. Investors should monitor the market for the arrival of this kind of set up in the days, and possibly weeks ahead. In other words keep an eye on TATY, and the red zone in the days ahead.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-178 (daily) and below Screenshot-177 (Weekly) format with the S&P-500 overlaid in red and blue candle format.
Investors will notice immediately that SAMMY generated enough strength this past week to rally back above resistance represented by the horizontal magenta line, but still keeps a long standing negative divergence in place relative to the level set at the February then all-time high in the price. SAMMY dipped briefly below the horizonal magenta line representing resistance this past week, but then bottomed and flew higher late in the week. This behavior, if it continues to strengthen, would imply another assault on new all-time highs by the price. It is additional evidence that the rally from the March 23 low may continue, and the next peril for the rally may not occur until the strategic indicator TATY enters, or approaches, the red zone surrounding the 140-144 level, where bull trends of past decades have tended to expire.
I would draw investors attention to the down sloping dashed magenta line, a big negative divergence, which gave us a terrific warning not to buy into the euphoria and fat prices prevailing at the September 2-3 all-time high, This setup does not always appear in the SAMMY indicator, but when it does it can be extremely helpful, and critical for the preservation of capital. In the current situation, if TATY completes the current budding “Big Chill” setup coincident with SAMMY having painted out another huge negative divergence with the price, then perhaps the long rally from the March 23 low will fall under the shadow of a change in trend from bull to bear. This is just a heads up to investors to one of the possible setups, which may develop to warn us that the multiple warnings of these past weeks may finally be coming to a resolution. In any case, remaining uncertainties and the fat valuation of the stock market suggests that a new bull market has not likely begun, but possibly just another leg up in an aging one.
Screenshot-177 shows SAMMY in weekly format, and puts into perspective the break out above resistance in the indicator, and the larger negative divergence current activity is displaying compared to the February all time high in the price, and the prior January high in the indicator, which negatively diverged with the price as it achieved the February price high. The break out this past week exceeds all the highs in the indicator since February, and implies a shift in the odds toward an assault on new all-time highs by the price. However, obviously the indicator currently lacks the strength it was generating in January-February period, so this is additional evidence that any rally in the price to new all-time highs is likely just another leg up in a continuing bull trend, as opposed to the beginning of a new bull market. The former implies continuing potential vulnerability to an expiration of the larger bull trend, and the latter would imply the birth of a new bull market with months, possibly years, of rally ahead. For now TATY, and SAMMY on both daily and weekly formats are implying a continuation of a rally, which may be gathering enough strength to assault (marginal?) new all-time highs.