Market Update

click image to enlarge

 

Since we are currently near the bottom of the long-term range and awaiting resolution of that trend, I thought it might be interesting to take a look at the market from the very long term perspective (using monthly bars)…

Let me start by describing my technical analysis parameters:

  1. The chart above shows the S&P 500 E-Mini Futures Options from that contract’s inception back in 1998 to the present date.
  2. Each candlestick bar represents one month.
  3. The bright red and green dots represent 12-month pivot highs and pivot lows respectively.
  4. The very long term (VLT) trend lines are drawn connecting those pivot highs (red) and the pivot lows (green).
  5. The dotted gold channel lines define the very-long-term range envelope (using a 12-bar look back).

In short, everything you see drawn in above is from a 12-month very long term perspective and is a great way to illustrate the difference between a secular bear market and a secular bull market–and to define precisely what it would take to change from one to the other going forward.

The term ‘secular’ may be transposed with ‘very long term’ (years to decades) as opposed to ‘cyclical’ trends, which are perfectly defined by Stops and Target’s ‘long-term’ (quarterly), ‘intermediate’ (monthly), and ‘short-term’ (weekly) trends.  All trends are cyclical to a certain extent, but the secular trend is foundational and is the longest practical investment/trading timeframe for a typical human lifetime.

Technically, the last secular trend change (from bearish to bullish) was confirmed on a trend line breakout on September 7, 2012 and as I pointed out at the time it was indeed a ‘HUGE deal’.

I have marked the last transition from secular bear to secular bull with a vertical dashed line on the chart above, along with a yellow highlight at the breakout.

As I have pointed out many times here, my definitions of market trends are as follows: A bear market is a series of lower highs and lower lows.  A bull market is a series of higher lows and higher highs.

The same definition can be consistently applied to any situation from minute bars to monthly bars.  So, let’s apply those definitions to the chart above…

Look at the pivot highs and pivot lows from 1998 to 2012.  What you see is a series of lower highs and lower lows.  I drew a red descending trend line through the lower highs.  The point where that trend line was finally broken to the upside was the official end of the last secular bear market, which spanned from 2000 to 2012.

Next, take a look at what happened starting in October of 2011… That was the date of the first higher pivot low, eventually building after an explosive rally from the actual bottom in March 2009.

Major bottoms and tops usually aren’t obvious to most people in real-time but there were significant clues that March 2009 was a MAJOR bottom.  The first clue was HUGE numbers of Bottom Spotters on the actual bottom date (March 6, 2009), followed by massive spotter confirmations in the coming days/weeks.  The next major clue came when the range envelope top AND bottom rails both began to rise, which can only happen in a trending market.  For that to happen, price first had to puncture the previously descending top rail, which happened in November of 2009.  

Note also that once price started trending higher, the bottom rail of the very long term range envelope has only been touched three times in the past nine years:  

October of 2011, which was a perfect low stress/low risk buy signal, and then in January and February 2016 (double bottom), which was again an absolutely perfect buy signal.

After the bullish breakout of the descending red trendline in September of 2012, the next confirmation came when the last lower pivot high was taken out to the upside in March of 2013.  Once that happened, it was impossible to continue to create a new lower 12-month pivot high–so the bear market was officially dead at that point and a new future higher pivot high was guaranteed.

The second higher pivot low was created in February of 2016 after a weak cyclical bear market (where no new pivot high was created) that began in May 2015 (with a double top in July 2015).  There has not been another higher low since February of 2016–and note with special interest that there has not been ANY higher pivot highs created since 2009!  As is plainly evident by looking at the chart above–this has been an extremely powerful bull market!

I have drawn the green secular bull market support trendline between the last two higher pivot lows.  Until we get a new higher pivot low, that trend line support defines the first technical hurdle that would have to be crossed to start a new secular bear market.  As I type, that rising trend line support is currently located way down at the 2305 area.

Any easier way to visualize the minimum depth of a pullback required to create a new higher pivot low is to use the range envelope channel.  The lower edge of the channel defines the precise target in real-time where a minimum pullback would need to go to create a new higher pivot low.  As I type, the lower edge of the very long term range envelope is at 2533.50.

 

Let’s take a look at where we are currently…

Both rails of the range envelope are at new highs, so clearly this is a trending secular bull market and will stay so until that rising lower range envelope rail is eventually pierced to the downside.

We got a counter-trend pullback signal at the 2947 high and then a counter-trend sell signal at 2870 on a break below the last higher candlestick bar low.  Both of those signals are counter-trend bearish.  While it is nearly impossible to recognize a MAJOR top in real-time, if this market were to start a rapid decline–that counter-trend sell at 2870 could be the mirror image of the countertrend buy (shown as green line with up arrow) that happened way back in 2009.  A big difference now from 2009 is that we did NOT see unanimous Top Spotters in the indexes/futures and simultaneous confirmation from Russell 3000 stocks.  However, markets tend to create V-shaped bottoms, and rounded tops at major turns, so there is that to consider as this engineered move continues to unfold.

 

 

 

The current downside scenario for the very long term only comes into play if/when the long-term is bearish.  I pointed out in my last post that we should see some churn around the long-term support area as huge bearish profit is taken by the pros–and that is exactly what we have been seeing so far.

The next clue comes from watching the bottom of the long-term range envelope (highlighted in yellow) on the screen capture from Stops and Targets shown just above.  The last range envelope signal was a counter-trend buy at 2712.25.  Price action is counter-trend bullish above that line but reverts back to fully bearish below.  If that counter-trend buy signal fails to hold then the very long-term chart at the top of this post might become of increasing interest.  Otherwise, if the current pullback finds a bottom near long-term support then the next target higher would be intermediate resistance at 2870.

I pointed out that the current ‘churn zone’ at and just below the long-term pullback target (2778.75) can be dangerous for bears who missed the earlier short trade entry signals much higher up.  After a small down/up wiggle, price remains right about where it was at my last post (near the long-term stop/reverse line).  In my experience, it is almost never a good idea to stay short against a Stops and Targets counter-trend buy signal, but we’ll see how this plays out.  As before, watching the bottom of the range envelope is the key in this setup.  Green is (counter-trend) bullish (back up to resistance)–and red would be fully bearish on a new range expansion to the downside.

Pros don’t usually kick off a nasty move like this without much malice aforethought.  The global socialists absolutely hate President Trump, and the mid-term election is nearing–so we shouldn’t put it past these characters to do something stupid to try to slow the economic momentum of the US economy (like continually raising interest rates, for example).

We will find out soon enough if this is just a long overdue pullback to long-term support (and a great buying opportunity)… or if it instead morphs into a long-term cyclical bear market.  For now, 2712.25 on the S&P 500 Futures contract is the key line to watch to see if the counter-trend buy signal from 12-October can maintain its foothold.

…my .02