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THE BOTTOM LINE

Paul Desmond, the late president of Lowry Research, often observed nothing is as difficult to analyze as price action alone, which is why I do not often venture into that potentially dangerous territory. However, in the early 1980s I was keeping hourly Dow charts by hand, and in the mid-eighties I was the first in the Southeast to own and install an Equatorial Satellite Dish strapped to a then state of the art IBM PC-XT equipped with one of the only charting software packages available at the time. For years I kept doing the hand charts side by side with the computer generated charts, so I have been deeply dipped in chart analysis. My work these days is aided by powerful gaming computers, and I consume huge volumes of data daily in order to cross confirm what is happening in the market from several different perspectives and analyses. However, every now and again some of those early days of keeping charts by hand causes bells to ring, and recent price only action is setting off bells.

Screenshot (237)

Screenshot-237 is a simple daily candle chart of the S&P-500 eMini futures contract, which as investors can see has painted out what appears to be a rising wedge. These formations tend to be rare, but also important from a diagnostic point of view.  According to the text book, rising wedges, or diagonal triangles, form as the final movement in a sequence, and are followed by a swift “waterfall” like decline back to where they began. Obviously, if one has some substantial profits one wants to protect, then cashing out a bit of one’s hard earned gain as this formation is nearing completion would likely be fortuitous.

I’ll be watching next week to see if the price rallies to new all-time highs with TATY and SAMMY failing to confirm the rally. This potential rising wedge formation is not complete, and may require some time to finish its last few movements, as these typically decelerate as they approach completion. If the wedge holds together, then the follow on “waterfall” decline would likely carry back to about the 4030-4040 area basis the S&P-500 eMini futures contract, which would be a nice discount to the current price.

However, before you get too excited about this potential setup a word of caution is necessary. In recent years triangles, and diagonal triangles, which decades ago seemed to always go to completion have in recent years tended to fall apart before completion. Education regarding chart analysis used to be only for the dedicated few willing to put in the endless hours necessary to learn this difficult analytical art. As this knowledge has become more common, I suspect too many are playing the classic chart patterns for them to be as reliable as in the past. For example, cycles which become well known tend to disappear, and the analyst in me suspects the same phenomenon may be happening with regard to the recognition of triangles of all types.

So, if the stock market jumps through all the required hoops, then we will bank some hard earned profits as the rising wedge nears completion. If not, then it will have been worth the effort to see if the market served up an obvious trade, obvious to those prepared for it.

Waterfall

The stock market is truly a master of disguise, especially when it comes to telegraphing its next move. However, sometimes out of what appears to be aimless rambling the market may give away some information about its intentions. The low volume meandering of the last several days may be just one of those times, as something recognizable may be developing for the astute investor? And, at this point in development I’d estimate about a 60% probability that the market will likely go the distance and complete a rare, but diagnostically important formation in the price. If the stock market makes new all-time highs in the next several days, then the probability that the market will take a rather swift and scary breather will rise to about 80% given the history of these rare situations.

I will walk investors through the remaining steps later in this update after we review the status of our proprietary supply and demand indicators.

TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

snapshot-278

TATY is shown above in yellow in Snapshot-278 with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 146 marginally above the red zone surrounding the important 140 level after wobbling around the red zone for the last several days. Given the lack of progress toward the 160 blue zone level, TATY is likely signaling that the price rally is experiencing some fatigue again. As long as TATY fails to establish bottoms in, or near the red zone, and tops near the blue zone at the 160 level, then the odds of some price weakness to reinvigorate demand will remain favorable. TATY’s current status is consistent with the price only analysis, which will follow later.

SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

Screenshot (236)

SAMMY is shown above in Screenshot-236 in yellow with the S&P-500 overlaid in red and blue candle chart format. After finally breaking out higher to confirm the rally in the price, SAMMY has once again turned tepid and lagging the rally in the price. This budding negative divergence is not yet significant, but it is consistent with the implication of the price only analysis, which will follow. So, at this point the status of both TATY and SAMMY is consistent with the implication of the behavior in the price.

 

Please be safe!

 

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ByOptimist Capital

Optimist Capital Institutional Wealth Management for All

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