MARKET ENVIRONMENT: by Woody Dorsey.
Last week was nominally friendly without, going anywhere! The overall pattern is for a defined drop into an interim low due later this Summer. I am trying to diagnose when this short covering rally will be completed or when it will set up for a defined breakdown. As we can see it still has a bid for now. It is all an endgame.
The Gestalt: The recovery rally still has the shape of a congestive range. Repeat: “Bear market rallies are notorious, in every way.”
This Week: This week is due to be nominally corrective but not be overtly so.
- Near Term Diagnosis: Sentiment is 88% Bullish today.
- Interim Term Diagnosis: The Interim profile remains: “Declines into early Fall well before the election. “July seems negative. There may be some sort of defining trigger in June.”
- Long Term Diagnosis: The “Next major Low has been due in 2022.” I am looking at possibly, Q4 of 2021 which would set up a very bullish first half of 2022.
QUESTIONS ANYONE? Please email any questions as they are likely to be of interest to all readers to [email protected]
MARKET TIMING: Near term timing remains complex. Expected upside last week resolve into some corrective potential this week then down into, 6/2 up, into 6/5ish? This Month end may maintain a bid bias. As we get into early June, better definition for the next leg down may clarify. I am looking closely at 6/5-6/8 for a turn. The next employment report comes due there and may be catalyzing.
SENTIMENT INTERPRETATION: The Dorsey Tactical Market Sentiment registered multiple 0% bullish readings suggested that “panic negativity was dissipating.” That was an enormous psychological event. This still looks like a churn here so don’t get too excited either way. It will be interesting to see how excited they get on this latest upside flurry.
The DORSEY Interim Market Sentiment registered an historic bullish feint at the February 19 highs. The interim pessimism near the lows (3/23ish) clearly allowed for a recovery rally. Interim sentiment is now high enough to indicate that the bear market recovery may be over or is nearly so. Beware of much more optimism at this stage.
MARKET SUMMARY: The next Interim low is due in late Summer. As advised: “The 2190ish S&P print low was an extreme which may hold for some time. The ability for stocks to stay bid argues for more of this complex recovery range.” That is continuing to be “fleshed out over the new few weeks.” There are two distinct top dates due for a high. The first one is around 6/5.
Trading Instrument (Gary Uses) My Trading Instruments are all based off of SPX numbers, but for long side trades I use (SSO) the 2x leveraged etf that follows the S&P 500 and when expecting the market to move lower, I use (SDS) the 2x leveraged etf that follows the S&P 500, it moves higher when spx moves lower.
TECHNICAL VIEW by Gary Dean: The definition of insanity is to do the same thing over and over again and expect different results. The bulls have tried and tried again, to gap their way higher to TRY and get buy in from the smart money and kick start a new bull market. They are succeeding for a short period of time to get to new rally highs, but leaving gaps everywhere, which is making yet another rally build with a toothpick foundation. The biggest issue with these types of rallies, sometimes it doesn’t take any negative news to move the spx lower. Nobody is comfortable when 90% of the gains are done when the cash markets are closed and eventually you see the bulls just start taking profits. The problem is, once we start lower, it typically picks up steam and we give back all the gains in a panic sell off and once we do turn, this time will NOT be different.
The bearish divergence on the NYAD remains in place, but if history is our guide, once we do see some weakness, maybe today/tomorrow, the bulls will come back and test or even slightly break whatever highs we leave behind before a more meaningful drop hits. As you can see on the daily chart below, we have bearish divergences as well as heavy resistance at the 3030-ish area. Everybody is all giddy about being over the 200 dma and most likely will provide the reason for the last of the retail traders to just jump long, which we know will typically mean, the top is near.
The bulls are over the 200 dma (2999) but as you can see, now hitting heavy price resistance at 3030 and then 3100. They are once again entering a major battle zone with no gas in the tank. Once we role over, it will pick up speed very fast to the downside. The bears need to get price back below the 2980/2950 support to get any momentum going on the downside. As much as I am looking for a hard drop, as Woody has explained, the 2190 is important support and we may just be range bound for the next year between 2190 and 3000-ish. If the bears can get below the 2950, then we should see a reaction trade down to the 2875/2760 zone.
The first level the bears need to get price below on a short term basis is 2981, which would cause a reaction trade down to the 2945. But until they can get price below 2921, the bulls will hang around. Below 2921, then we should see the 2875/2845 support come into play.
Summary: The bulls have had (2) massive gap higher opens that has brought the spx above the 200 dma. The peeps are starting to get excited that they finally were able to ride the Feds coat tail, after fighting it for 10 years. It will be short lived, but for now, the bulls are believers. With today’s big gap higher open, typically we will see some backing and filling followed by a test or very slight break of the highs we leave behind. That does fit Woody’s road map for a high coming near the 06/05, which is next Friday. As of now, we have sell signals on the NYAD and almost all other time frames (15’s are starting a new divergence) The previous backing and filling moves lower were between 50-75 points and took between 2-4 days to play out. I wouldn’t be surprised to see the same here and then the final push to test/break these highs next week, before starting down hard.
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