Reading the tea leaves here on the current market configuration…
The screen capture above for the S&P 500 Futures from Stops and Targets shows that since the market bounce at 2174 (see long-term range bottom) we are currently experiencing an intermediate rally in a long-term bear market. The summary text above describing BULL 3 rating sums that all up nicely.
There are powerfully-opposing forces at play here and that is reflected in the stop/reverse lines on the single bar chart above and also by looking at the range envelopes…
The long-term stop/reverse line has recently moved lower in the bear’s favor but things are likely feeling a bit uncomfortable for anyone still short who missed the bounce at the bottom, or who has shorted since and is currently being squeezed.
On the other side of the spectrum–new bottom picking bulls are likely feeling pretty good here with the market moving up over 600 points since that March 23rd low.
Both sides are possibly approaching a major reckoning just ahead. Let’s take a look at my charts and I will explain that comment…
click image to enlarge
Each bar on my chart above represents one month of trading. This long-term decline began when the last higher monthly bar low was broken to the downside at 3169.75 (you can see a small red dot where that trend change occurred). Note that when you reference the Stops and Targets screen capture at the top of this post that it also shows that price of 3169.75 as the start of the long-term bearish trend on 25-Feb-20.
Note that when the previous monthly bar closed on 31-March, the long-term stop/reverse line moved down from 3169.75 to the March monthly bar high at 3125.75. That is what I meant earlier when I said that the long-term stop/reverse line moved in the bear’s favor.
It remains to be seen how the April bar will eventually end up–but so far, we are experiencing an ‘inside bar’ where both the high and low are contained inside of the previous bar range.
Since the long-term is currently trending bearish (as a result of lower highs) that trend cannot be reversed until we eventually get a close ABOVE the last monthly bar lower high. That last lower high at the long-term stop/reverse line is pretty far away currently, but as time goes by those monthly highs will eventually come into striking range.
Once a bottom has been established, the kind of severe damage that has been inflicted upon this market usually takes an extended period of sideways consolidation as intermediate resistance levels are encountered and eventually assimilated. It is a long process and like it or not, this is a long-term bear market now and will remain so until such time as we eventually get a breakout above the last month’s high.
On the other hand, if a bottom has NOT yet been established then those resistance levels can become powerful areas of selling where the market turns back down. To better illustrate that point, let’s take a look at the weekly bars next…
click image to enlarge
Each bar on the chart above represents one week in the market and corresponds with the intermediate timeframe at Stops and Targets.
The first point to make is the difference between the individual weekly bar sequence versus the monthly bars. Note on the chart above that we see three consecutive weeks with higher lows and higher highs... that is the very definition of a bullish trend.
Also note that the previous weekly bar bearish trend was reversed when price crossed above the last lower weekly bar high at 2634.50. That is where the intermediate-term stop/reverse line currently sits at Stops and Targets. Note also that in order for that stop/reverse line to move higher and begin to trend–a subsequent bar’s low must be higher than that stop/reverse line. We will see on the close Friday how the current bar ends up. See how that works?
Those of you who have been reading my rants here for years are aware of what I long ago discovered and christened what I call The Weekly Bar Paradigm. I won’t go into another long explanation about it here but for new readers to this blog–just search for that term using the search box to the right of this post. Trust me, it is well worth your time and effort to understand the current paradigm if you want to truly understand how this market really works and how it is carefully and very skillfully managed.
So, back to the point–if you look at the red line at 2846.50 that is circled in yellow, many of you will recall that I said back in February and March that line is a VERY important level. Well, here we are about to revisit that line from the other side now.
Why is 2846.50 important? For two reasons:
1) That was the last higher 4-bar pivot low on the weekly bars before the takedown. The essence of The Weekly Bar Paradigm is that it will continue in effect (11 years now since the paradigm started) until such time as price cannot rally and hold back ABOVE the last higher 4-bar weekly pivot low. In the last 11 years there have been only 10 previous times where a major stop sweep/reversal has occurred. In every occurrence, that was a perfect buying opportunity for long-term bulls to rejoin the secular (very long term) bull market. I have also said that if/when price is no longer able to overcome and hold above that line then we will know with absolute certainty that the secular trend has changed. So yeah, it’s kind of a big deal to watch carefully how this resolves in the coming weeks and months.
2) That line at 2846.50 is also where a formidable band of resistance starts as a result of a previous significant bounce at that line, which later failed. Take a look at low of the February bar where price bounced at 2846.50 and then the bullish weekly bar that followed. A LOT of new buyers hopped in there and it is those buyers who represent current SUPPLY that will soon flood the market if that resistance is breached. Why? Because all of those buyers ABOVE 2846.50 are currently trapped with losses on the long side. Many of them are ready and very eager to sell at or near break-even to simply escape the pain–should the opportunity be presented. The SUPPLY from those sellers can easily overcome DEMAND from new buyers if the poke into those levels is timid. On the other hand, if we were to see a hard push on the futures with opening gaps higher–that is one way for the pros to leapfrog that supply/demand issue. We will know shortly what their intent is on that matter–but for now, it is important to be aware that we are approaching a very significant layer of resistance that corresponds to the area between 2846.50 and the open breakaway gap down at 2952.75 which is where those bulls who entered above 2846.50 were brutally gapped and trapped by the pros.
So, to recap on weekly bars… higher highs and higher lows sequence of bars is definitely bullish. This timeframe would reverse back to bearish on a cross below the intermediate stop/reverse line, which is currently located at 2634.50. We will see where things stand on Friday at the close to determine the intermediate outlook–but a major resistance test looms just ahead and so this budding bullish uptrend is potentially vulnerable. Perhaps the pros can blow right through that with the right kind of news and noise (ending of house arrest, for example). This sort of uncertainty is often the breeding ground for good trade entries. It is not easy or comfortable to enter at times like this–but it never is at key inflection points is it?
Remember, open gaps are a sign of intent by the pros. The last open gap was UP at 2482.75 and precipitated the weekly bar breakout and trend change. The closest leftover gap DOWN was at 2952.75. See how that works?
That range between 2846.50 and 2952.75 is the band of resistance just ahead as I type… let’s watch carefully to see what the pros decide to do with this setup. It is long-term bears versus intermediate term bulls.
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