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    The stock market is an exercise in dealing with uncertainty by constantly and effectively applying a stream of probabilities in pursuit of the best outcome.

    As the stock market continues to successfully disguise its true intentions, perhaps this would be a good time to revisit what has happened in the remarkable year of 2020 to date, and then weigh all the evidence to see, if the best path forward becomes obvious given the weight of the evidence. Opinions are colored by our own personal biases, which the market does not know, or care about, so those always represent risks to our wealth. The drill is to align ourselves with the market, and not the other way round, which is not an easy task.

    Screenshot-131 above shows the February all-time high in the S&P-500 followed by the swiftest plunge in stock market history to reach a 30% decline. The plunge ended on March 23, 2020 at 2191, which made the total decline 38% from the all-time high, which was just shy of 3400. The powerful and swift nature of this decline imply it is likely the kickoff to something larger, and not the end of a bear market, which began perhaps a couple years earlier. So Exhibit One is the initial “plunge” to the 2191 low on March 23.

    Screenshot-131 also shows two up legs developed during the recovery rally with a multi-day consolidation phase surrounding the 62% recovery level, which separates the two up legs. Screenshot-131 clearly shows that the second leg up is related to the first leg up by the Fibonacci ratio of .618. In this situation this is additional evidence that the recovery rally is much more likely counter-trend in nature, than a kickoff leg in a newly minted bull market born out of the 2191 March 23 low. So exhibit Two is the recovery rally contains a Fibonacci relationship of the second leg up to the first leg up, which is more typical of relationships usually found in counter-trend rallies in bear markets.

    Screenshot-138 above shows the second leg up in the recovery rally, which ended with an “island reversal”, which is shown above the ellipse on the chart. These formations are fairly rare in movements of this degree, or scale, and graded by analysts as bearish signals. These typically form when there is extreme bullish sentiment resulting in a buying panic leaving a gap up in the price, which is then quickly followed by buyers exhaustion, and/or disappointment causing a gap down on the chart, which completes the “island reversal” top pattern. Analysts interpret this as a reversal of market psychology from extremely bullish to sudden concern or caution. If you have ever been a parent of a teenager, then you may have witnessed the sudden change in romantic notions, and the attendant emotional trauma, which are typical in that age group. Island reversals can be a signal that a similar psychological change is afoot as the day before investors were in love with the market, but today not so much. So Exhibit Three is the “island reversal”, which implies a change in market psychology among investors.

    Screenshot-139 above shows the island reversal after the recovery rally stalled out at S&P-500 3233. The gap which formed just below the island is shown by the ellipse on the chart. There have been multiple attempts to rally above the gap, but to date all have failed in the gap. So the all-time high just shy of 3400 has not been bested for going on five months now, nor has any attempt to rally above the zone formed by the gap after the island top has been able to go above the recovery rally high at 3233. During the multiple attempts to rally above 3233 the Administration, the Congress and the Fed have all signaled the market that the powers that be were going all out in their support, but so far the market has only produced multiple failures to take out 3233. And, Thursday’s opening spike back into the zone of the gap on positive news for a COVID-19 vaccine was not sustained, as the market sold off for the rest of the day. So Exhibit Four is copious amounts of positive news from the government, the employment reports, and the bio-tech arena, have only resulted in more rally failures in the gap below 3233. If the best possible news fails to move the market higher past resistance, then what will?

    Screenhot-140 above shows some of the same information as Screenshot-139 only in weekly format. This format more dramatically shows the zone of the gap with an extended ellipse. The struggle to move above the gap is apparent on this chart. Last week’s update alerted investors that the bears, to maintain control, had to begin to make the price violate several support levels. Of course to keep investors guessing, the decline was arrested by the 50% Fibonacci retracement and support level, after which the market rallied back into the gap zone on Thursday. The good news is the range at which the market will likely declare its bull, or bear, intention is getting progressively tighter. The odds will tilt back in favor of the bulls, if the market can generate enough strength to take out first the 3233 recovery high, and then shortly after begin to assault the all-time at just shy of 3400. However, just as last week it appeared a rally may develop near Fibonacci support, this week it appears the spike back into the zone of the gap may have exhausted the bulls. And, another failure in the gap zone may beget selling.

    Screenshot-141 is a big picture look at where things stood on the close on Thursday. The burden of proof on the bulls was just covered in the previous paragraph. The case for the bears, while straight forward, is a bit more complicated, because of multiple support zones, which must be violated for the bears to maintain control of the market. The bear case will be strengthened by a decline first below the 50% retracement level at 3000, then a breach of the 2933-2945 double Fibonacci level (double green lines). A decline below this zone would be a violation of the notion that previous resistance once breached becomes support. Investors will recall that the 62% retracement level of the decline from the all-time high to the March 23 low surrounds the 2933 level, which was resistance for the recovery rally for three weeks. A break of that level, which is also the 62% retracement of the second leg up (2945), may lead to an accelerating decline given the significance of the support implied. So the bears must prove they are in control by violating in succession a number of progressively lower support zones.


    TATY is shown in Snapshot-361 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at an oversold level of 124, and continues its string of consecutive weeks of abnormal and atypical behavior. TATY continues to imply that the recovery rally may be a trap for the bulls, which is Exhibit Five for the bear case. A new bull market off the March 23 low would have likely been lead higher as bull trends of the last several decades by TATY pulling the price higher like a larger cosmic mass does on a smaller. TATY continues to imply that the February to March 23 swift decline was just part of a larger movement, and not the end of a complete bear market.


    The bull case is simple enough, the bulls must power through 3233, and then assault new all-time highs for the odds to turn in favor of a new bull market beginning at the March 23 low. The bears must prove that they are in control by violating progressively low support zones beginning at 3000, then the more challenging level of 2933-2945 on a closing basis. A violation of the 2933-2945 support level may set up conditions favorable for an accelerating decline lower, perhaps similar to the swift decline off the all-time high, or potentially even stronger. The potential for swift and devastating wealth destruction in the second legs down in developing bear markets still causes us to favor preservation of capital given the current weight of the evidence. The outcome remains uncertain, but for now the odds, and the weight of the evidence, favor the bear case. If we are wrong, then there will likely be many months of rally ahead in the newly minted bull market, which would likely provide many opportunities to make up for the modest loss of opportunity resulting from our stated mission of preservation capital first, in this year filled with an extraordinary number of  serious, and in some cases, life threatening uncertainties.


    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.

    ByOptimist Capital

    Optimist Capital Institutional Wealth Management for All

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