In my last post I concluded with an observation that the market was looking a little precarious after a Top Spotter was generated on May 1st in conjunction with a double top from September of 2018. Price action has been mostly down since the Top Spotter confirmation sell kicked in at 2916.
So, let’s take another look at the market configuration here, comparing Stops and Targets with my charts in three timeframes…
The screen capture above shows the S&P 500 Futures Options analysis page from Stops and Targets. My eyes start at the chart on the right and what I see is a short-term rally in a long-term bearish market. I say that because the bottom stop/reverse line at 2763.75 is green and the top stop/reverse line at 2844.50 is red. The bottom line represents short-term (ST) and the top line represents long-term (LT).
I then read the analysis and it confirms my initial impression. This is a BULL 1 multitrend configuration (short-term rally in a long-term bear) with short-term resistance next coming at the IT stop/reverse line at 2841.25.
Let’s take a look at my charts next to see how those numbers were calculated, and maybe get a little deeper insight on the Big Picture…
The monthly bar chart above represents the long-term timeframe…
The very long-term bullish trend is certainly intact, as shown by the rising green trendline since the 2009 bottom–but we currently have a long-term pullback underway.
How do I know this is a pullback, you might ask? The answer is found by comparing the current bar (June) high/low range to the previous month (May) bar high/low range. So far, we have a lower high and lower low relative to last month–so long-term price action remains bearish until/unless we see a breakout above the previous bar high to resume the very long term bullish move. It is unlikely that we will see that happen this month due to the length of the prior bar. That’s not to say it can’t or won’t happen–but current odds suggest it is unlikely, especially while price trades below the long-term stop/reverse line, which is currently at 2844.50.
So, the next question one might ask is ‘what determines that stop/reverse line?’, to which I would reply ‘excellent question!’ and then proceed to explain…
Many times here I have repeated my definition of a bullish trend as ‘a series of higher highs and higher lows’ and a bearish trend as ‘a series of lower highs and lower lows’. So let’s apply that definition to the current bar and the previous bar…
Last month we saw a break under the series of higher lows from the previous 4-month bullish trend sequence (higher highs and higher lows). That break below the last higher monthly bar low came at 2844.50. At that exact point, Stops and Targets generated a long-term sell signal. See how that works?
That trend change line became the long-term stop/reverse line. It won’t move again until a new trending sequence starts–either a lower high (bearish) or a higher low (bullish). Since we already have a lower low, we can’t have a new bullish trending sequence start this month, unless price were to break above last month’s high. We could, however, still see the stop/reverse line move lower at the end of the month (still a long way away) but only if the June high remains below the stop/reverse line. There is lots of trading action yet to come, so we’ll have to wait and see how it goes–but so long as the current monthly bar high remains below the stop/reverse line the bears have the statistical advantage.
One last point on the stop/reverse line. If price is trading inside of the previous bar on the chart–we have a ‘rangebound’ market. that is what Stops and Targets is saying with the sideways arrow ↔ next to the long-term trend on the range envelopes section. The red color of the arrow lets us know that it is current rangebound… but with a bearish bias under the stop/reverse line.
One last thing to point out at Stops and Targets’ range envelope section…
Do you see how the long-term lower envelope number at 2750.00 is colored green? That lets you know that a bullish range envelope signal occurred there. In this case, it was a counter-trend buy signal, which is analyzed in detail on the long-term tab…
… the long-term range bottom rally signal was generated when price dipped below that range (to a new current bar low of 2744.00) and then crossed back above the previous month low at 2750.00.
Note that it was a great warning signal for a potential short squeeze rally start. Note also that the upside counter-trend target is the stop/reverse line at 2844.50
All of that jives perfectly with my chart analysis. Pretty cool, right?
Next, let’s move to the intermediate timeframe…
Each bar on the chart above represents one week of trading. The intermediate timeframe at Stops and Targets is based upon weekly bars.
What I see is five consecutive weeks of lower highs. Clearly, the trend here is bearish and since the previous bar’s high was lower than the previous location of the stop/reverse line, that line has moved lower to follow the trend and to designate the precise point where, if crossed, the intermediate bearish trend would reverse.
Last week’s bar high was 2841.25 and if you refer back to the Stops and Targets screen capture at the top of this post you will see that is exactly where the IT stop/reverse line is currently located.
Also, if you look at the range envelopes section you will see a red down arrow ↓ , which indicates a trending intermediate bearish market (lower weekly highs along with a descending stop/reverse line).
Same deal here as for the long-term regarding a bullish rally in a bearish trend. We would need to see a new higher weekly high to reverse the intermediate trend. Note that professional traders will typically trail protective stops at the stop/reverse line to lock in profits from a trending move.
It is usually best not to be long below a stop/reverse line in that particular timeframe.
Intermediate bears are fine below that line, but would begin to cover and reverse on a move above.
Last, let’s take a look at the short-term timeframe…
The short-term timeframe at Stops and Targets is based on daily bars. The current daily bar (June 5) shows a higher high and higher low so far today. That is the second bar in a sequence to a higher low and higher high yesterday… that is a bullish trend.
You can see that the last lower high in the previous bearish sequence was at 2763.75. When price crossed above that line it also crossed the short-term stop/reverse line and became a buy-to-cover signal for short-term bears and a simultaneous buy signal for short-term bulls. See how that works?
If today’s low finishes above the short-term stop/reverse line then that line will move higher (to today’s higher low) after the close to protect and lock in bullish profits. If/when that line is crossed below, then it would be time for smart short-term trend-following bulls to sell–and the door would open again for bears to rejoin the downtrend after the short squeeze runs out of momentum.
I have added a screen capture from Stops and targets above to show where/when those short-term signals were generated…
The short-term trend started at the stop/reverse line cross of 2763.75 on June 4 and has advanced +49.25 at the time of this writing.
Note that the next upside target is 2841.25, but also note that target (intermediate stop/reverse line) may not be hit if we continue to see a sequence of lower weekly highs on the chart. All signals have to be taken in context with the next higher timeframe.
This bullish rally is very nice (if you are not a bear being squeezed, that is) but it still has some work to do to reverse the larger context bearish structure that is currently in place.
So long as the daily bars continue to build higher lows, it’s all good for bulls here–but look out below if that short-term stop/reverse line fails to hold on a pullback. Especially if we eventually see lower highs form on the weekly and monthly bars.
All bullish reversals start in the short-term timeframe, of course, and must ultimately challenge and then overcome bearish resistance from the higher timeframes. Let’s see what happens next if/when price gets to the intermediate stop/reverse line.
Ideally, I would love to see (or have seen) a huge trove of Bottom Spotter signals mark a solid reversal bottom–but this current pullback from May 1st started from a Top Spotter configuration, that was actually a sneaky double-top with a nasty outside bar on the monthly and daily bars–followed by a big gap down open on May 10th. That was most likely the pros doing their thing to trap and exploit bulls after earnings season and the annual Russell Reconstitution was complete.
Not sure this feels like anything terribly more than pocket-picking at this point by the pros, but we’ll have to wait and see how the structure I pointed out above unfolds going forward.
It’s all good for short-term bulls above the stop/reverse line at 2763.75 –but a sell-off move underneath today’s current low at 2801 would bring higher timeframe sellers back in.
The intermediate stop/reverse line is very important going forward. LT/IT bears don’t want to see that line broken to the upside–but ST bulls are salivating at the prospect of pushing into the trove of buy-to-cover stops above those stop/reverse lines that are following those trends lower.
Just like the Stops and Targets summary chart shows… it’s currently all about 2763.75 below (2801.00 if today’s current low holds into the close) for ST bulls, and 2841.25 above for IT and LT bears.
…that’s my .02