The BluQuant Oracle™

Monthly Forecast - May 3, 2022

It is helpful to visit the monthly charts at the beginning of a new month. While they are too slow to trade, the charts give us much-needed perspective.

There is an old saying about the stock market – “when in doubt step out,” Of course, a variant on that phrase might be “when in doubt get out.”

Nevertheless, let’s take the opportunity to step out and get some perspective on where we find ourselves and where this stock market may be headed.

The discussion below will highlight that the market has taken out some key levels. But with the 21-month line still intact, we don’t have an official bear market in the S&P 500 index yet. But many underlying sectors, such as technology, are already there. Perhaps this is nothing more than a nasty correction from the S&P 500 index perspective, and the party is still on. But I seriously doubt it.

After reviewing the charts and highlights below, you will know where to find your seats if the bear progresses. If you are still in the market, make no mistake – you are in the nosebleed section. Rallies should be used to cull your holdings.

I will discuss where supply and demand lie and where the downside targets should take us below.

In the meantime, it is important to note that bear markets behave opposite to bull markets. We will likely encounter slow, methodical declines, interrupted by brief, sharp, rip-your-face-off short-covering rallies.

When this correction or the bear is close to the bottom, we should see a waterfall decline and spike lows to give us advance clues. We have seen some of that this past week, but no real fireworks.

In addition to discussing the price analysis below, which leans bearish, there is nothing else in our arsenal that indicates the market will find an important low here. I am only expecting a short-covering bounce, and lower prices are still possible in the midst of today’s announcement and Fed theater.

The market may dip initially on the announcement, before commencing a short-covering rally perhaps from 4000 if temporary lower prices manifest.

Our algorithms are neutral (with a green arrow on the weekly time frame and one close to painting in the daily time frame), but market internals are still weak. The main positive is the negative sentiment, especially among retail traders. The retail crowd tends to be wrong at the turns but the smart money is back to bullish.

The cycles and sentiment support a bounce, but not “THE” low. It likely will take very extreme readings to bring us to the ultimate bottom in these challenging circumstances.

And don’t forget to review the Thesis, especially the Dow Chart from the 1970s. A trading range would throw both bulls and bears into a tizzy, which is why I call them “kill zones.”

The Naked Price Action

We begin the analysis with a blank slate – focusing first on the price action alone.
The April monthly candle closed on its low (negative), with less volume than March (less negative).
The low coincides with the February and March lows, leaving us with three monthly price bars in a row that are roughly the same size.
The price action represents a trading range with a slight downward slope, which will be more evident in lower time frames.
The April candle fell short of the top of the March candle when the price rallied, so that is a subtle sign of weakness.
But the price dipped slightly below the February / March lows today (May 3rd) and returned back into the range, a subtle sign of strength.
If the price breaks the February/March lows decisively in May, various mathematical projections to lower prices come into play, as would be the case if price decisively breaks the January and February highs.
Whichever way it breaks, the measured move is double the range. Keep that projection in your narrative.
Trading ranges become self-reinforcing over time, so keep that concept in your narrative as well. Range bound prices also indicate confusion over the market’s next direction.
Though the range is wide at approximately 15%, the price action reflects bulls and bears are relatively balanced over the past few months.
In one sense, it is amazing that the market has held its ground in light of current events.

The Sequential Algorithms

As we delve deeper into the analysis, we next add some sequential counting algorithms to our previously blank slate. The counts were developed many years ago by behavior analyst Tom DeMark, and they appear on the chart immediately above.
I won’t bore you with the details, but a nine-count generally is a time to pay attention as a price reversal may be imminent.
Two in a row is even more consequential.
Notably, there were two nine counts in a row preceding the January peak.
There was a nine-count at the bottom of the 2008-2009 bear that led to the reversal.
A nine or 13-count is not required for a reversal, but we pay attention when the counts are present.
Of course, a monthly chart is a slow-moving train, so it is best to view it for a 30,000-foot perspective. You could lose a lot of money or miss a lot of gains waiting for signals at the monthly level.

Adding the Key Moving Averages

Now, we want to add the key moving averages relevant to the monthly time frame. For now, the 5 (red), 21 (green), 50 (blue) and 89 (cyan) lines are the most consequential. They are drawn on the chart immediately above.
In a corrective mode, sellers are favored when the price drops below the 5-month line (red) and will tend to sell any attempts to reconnect to the line.
The 21-month line (green) becomes the threshold between minor corrections and more consequential bear markets. The 21 tends to cradle the rally legs from the middle of the longer-term price channel. We will look more closely at the channels below.
In this case, the bull market advance from the 2009 lows is the first, relevant, and longer-term price channel.
As is the case in almost every time frame, the 21-month line represents the mean of prices in for this channel.
Selling accelerates below the line. And in this case, the 89-month line is the dynamic, lower channel line for the 2009 bull market.
Of course, you could draw straight trend or channel lines representing the top, middle, and bottom of the 2009 bull market and I will do so below.
But I like to think of the related moving averages as the dynamic and more responsive way to draw the top, middle, and bottom trend/channel lines.
Summarizing, the 21 represents the middle or mean of the 2009 bull market and the 89 should form the lower boundary. The 5 cradles the shortest-term rallies during the bull run, which are more discernible on the lower time frames. A break of the 5 is always the first clue to shifting sands.
At this juncture then, the 5 is broken which sent us to the 21. The April price candle closed on the 21. If the 21 breaks, the price next travels to the 89.
If the 89 breaks, and such occasions are exceedingly rare, then the market is clearly in the throws of a serious bear, and the longer-term, 100-year channel is in play.
In this case, 2500 represents the mean of the 100-year channel, and would likely be the next stop. The level is associated with the March 2020 Covid-19 lows. The level is also consistent with stripping off the last rally leg in the bull market, a common occurrence in a bear market.
If you look to the extreme left of the chart above, you will see the that the 2008-2009 bear broke the 89, and bottomed significantly below the line.
In other words, when the price reached the 89 in the 2008-2009 bear, it was only one-third of the way to the ultimate low reached in March 2009.

This is the 100-Year chart of the Dow Jones Industrial Average showing the market's current location three standard deviations above the long-term mean (middle of the price channel). The market has achieved these levels only three times in history: 1929, 2000, and now. The prior two cases did not end well. The market fell from the channel top to the bottom in a 90% crash to resolve the 1929 overvaluation. From the top in 2000, the stock market dropped over 50% twice over a lost decade to resolve the overvaluation.

The 100-year Price Channel

Have you ever been to a park or hiking trail? They start you out with a map “You are Here.”
Similarly, I pulled the 100-year chart from our Current Stock Market Thesis, and marked our current location on that map.
We keep track of these longer-term charts for perspective. Our location is sobering by any measure.
The stock market, if nothing else, is an exercise in mean-reversion, manifested in fractals of multiple time frames.
In the stock market, we travel in percentages rather than miles. And it is not a place where you want to earn frequent flyer rewards.
A trip from the top of the 100-year channel to the middle is roughly 50%. To the bottom, it is 75%.
The ultimate number depends on how fast we drive. 1929 was a Ferrari crash. The decline was fast and steep at 90%.
In the 2000 case, the market took the scenic route for nearly nine years. It stayed in the upper half of the channel, and tagged the middle twice with 50% declines – the 2000-2003 and 2008-2009 bears. Both bears were part of the process to correct the 2000 top.
How will the market resolve our current location on this map?
Let’s take a closer look.

Currently, the market is holding the 21 and hasn’t even violated the 2009 bull channel.
The market could still take another trip up to the top. It is not easy to kill a bull market, as even the Federal Reserve is learning.
And I am surprised there has not been a retest of the all-time January highs. It is unusual for the market to roll over into a severe bear market without at least one attempt at the old highs.
But this is an unusual time, to be sure.
We will monitor these levels closely in the weeks ahead.

Timing the Lows and The Flows

Now that we have looked at price, let’s take a quick look at time.
The market responds to fund flow cycles in multiple time frames. The projected cycle lows act as magnets, pulling prices down into their troughs.
While cycle peaks vary widely, the troughs tend to arrive on discernible, symmetrical rhythms , with slight variances.
Each larger cycle includes smaller cycles bottoming simultaneously. The more cycles that are bottoming, the deeper the trough and the more important the low.
The cycles tending to make the most significant corrections in our windshield are the Nominal 54, 18, and 9-month cycles.
The market is currently correcting the 9-month now, and it is due to bottom between late May and June.
Sometimes the bottoms arrive early, sometimes late. But it is helpful to know when the cycle lows are in the neighborhood, such as they are now.
Bottoming is a process that can take several weeks – e.g., an initial low and then a retest a few weeks later.
With the Fed announcement tomorrow (May 5th) and monthly options expiration on May 20th, there are plenty of motivations to pivot from a nominal 9-month trough that is forming an intermediate low.
So the future troughs are somewhat predictable. And that is how we know that the nominal nine-month cycle trough is due any time now or into early June. A granular look at the cycles coming into this period appears in the chart below, partially sourced from Steve Miller at AskSlim.com.

The other helpful information to be gleaned from the cycles is that the upcoming September cycle is far more critical than the one bottoming now.
Absent a news event; the cycles would tell us that the selling pressure should let up now and through July/August after the market establishes the low in this current trough.
That doesn’t mean that the market is going to new highs and possibly supports moving to the top of the trading range – supporting my “kill-zone” hypothesis.
But wherever the market finds the low now, and that could still be at lower prices, the cruelest decline in this bear is likely to manifest later in the year.
And can’t you see it? Another crazy election, global conflicts, challenges to the dollar, a potential recession, etc.

It was all Predicatable from the 2009 Low

Another critical piece in my methodology is to examine my original projections from 2010. They give us a good idea of where the market will encounter support and resistance along its path in the bull.
In other words, we projected the potential 2008-2009 bear market recovery long before it happened, once we believed that the bear market low had been confirmed, about a year after it occurred.
You are looking at the lines drawn from that work in the chart above.
While I keep a lot of this work proprietary, you should glean from this chart that we encountered the final line in the sequence in January, even overshooting it slightly. This line should be the top of the 2009 bull market, all else being equal.
In other words, we had every reason to expect January to be the top and a top of some significance.
I have created lines between the lines, guiding us to support and resistance as this market slips and slides up and down. The lines are very effective, in order of their magnitude / significance.
And there are helpful lines above these if the market were to enter a blow-off stage higher, as it did in 1929.

Supply and Demand

I am also following some additional supply and demand lines as can be seen in the chart above. Some of the lines are repeated from the channel analysis. Carry these lines forward in your narrative.
For now, stay focused on the Primary Supply line coming down from the January peak. The line should act as resistance. If price is accepted above the line, another trip to the top of the range is the minimum target, and new highs are possible.
If that were to occur, the S&P 500 index would remind me of 1994, where the bear was stealth and under the surface, but the index itself never reflected the full extent of the damage.
Think about it, while the leading sectors from the Covid lows have been battered, it had not been a synchronous decline.
Energy, Materials, and Industrials have offset losses in Technology, Communications, Financials, and Consumer Discretionary.

Putting it All Together

Putting it all together, with all of the information covered, I came up with the chart immediately above to monitor the market as it progresses.
The blue checks are the most critical support levels based on my current analysis.

Overlaying the 2000-2003 Bear

If we can stipulate that lightning never strikes the same place twice, let’s overlay the 2000-2003 bear market (in yellow drawn to scale) for fun and perspective.
Were history to repeat ( and it’s doubtful it would repeat quite the same), we would clearly be early in the bear, with lots of zigs and zags ahead.
But knowing that market history has a tendency to rhyme, let’s keep an eye on this potential roadmap for additional perspective.
The 2000-2003 bear is somewhat comparable to the current environment – where the Fed stepped in to prick the dot-com bubble. Of course, the 9/11 tragedy enhanced the bear in its later stages.
Now, lets do the same overlay, but this time with the 2008-2009 bear.

Overlaying the 2008-2009 Bear

The 2008-2009 bear was more of the Ferrari prototype. It went down further and faster in less time than the 2000-2003 bear.
The Financial Crisis bear market was possibly more news and event-driven as the Lehman collapse moved into full gear. And the entire global financial system sat on the brink of disaster.
We currently have aspects of 1929 (World Wars and Weimar Republic inflation), 2000-2003 (bubble), and 2008-2009 (potential financial crisis associated with Deglobalization and bipolar currency resets). And whether the current situation is related or unrelated to the past, we have both an overvalued market and global events that are festering. As such, speed and scale are difficult to predict.
But at least we know from our regression analysis that a likely landing spot is the middle of the 100-year price channel, currently 2500 on the S&P 500 index.
And as mentioned above, that would also make sense, as a bear market typically retraces the final bull rally.
So the entire rally from the March 2020 low is the poker chip on the table if you are a buy-and-hold investor. But if you have cash, a retest of that low might bring us to the final chapter in this bear.

Conclusion - Buy on the Canons and Sell on the Trumpets

Ben Franklin said it long before Warren Buffet. You buy when there is blood in the streets. This market is running out of artificial sweetener.

So It is helpful to visit the monthly charts at the beginning of a new month. While the monthly time frame is too slow to trade, it gives us much-needed perspective.

Our discussion highlights that the market has taken out some key levels, but with the 21-month line still intact, we are not yet in scary territory. Perhaps this is nothing more than a nasty correction, and the party is still on.Perhaps the true damage in this market, like 1994, will remain stealth.

But I seriously doubt it. The bond market is screaming warning signals at the top of its lungs, and global unrest continues to rise.

Sure, some of the generals have fallen, but certainly not all of them. And I continue to expect something to break, with all the damage to bonds and currencies – e.g. the Japanese Yen. I expect to wake up one morning soon, as the first bodies float to the surface.

But at least now if the bear progresses, you know where your seats are in the stadium. Per the 100-year channel this market remains in the nosebleed section and the game is likely only in the second quarter. But we can now find the exits, identify supply and demand, and establish reliable downside targets.

In the meantime, bear markets behave opposite to bulls. You have already experienced this. We encounter slow, methodical declines, interrupted by brief, sharp, rip-your-face-off short-covering rallies.

When the bear is close to the bottom, we may see a waterfall decline and spike lows to give us advance clues. But remember, nobody rings a bell – so stay tuned to these pages, or you will miss the cue.

In addition to price analysis, nothing else in our arsenal indicates that the market will find a critical low here. Our algorithms are neutral (with a green buy alert on the daily chart). Market internals are still weak.

The main positive is the negative sentiment, especially among retail traders. The retail crowd tends to be wrong at the turns, and the smart money is back to bullish.

As we observed, the cycles and sentiment support a bounce, but not “THE” low. It likely will take very extreme readings to bring us to the ultimate bottom in the weeks ahead. We want to see fireworks and panic before jumping back in with both feet.

At this order of magnitude, buying with a long-view has to be scary. You should be nauseous, with a pit in your stomach, when you pull the buy trigger. Otherwise, it isn’t likely to be a good entry point.

And don’t forget to review our Current Market Thesis, especially the Dow Chart from the 1970s. A trading range would throw both bulls and bears into a tizzy. That is why I call trading ranges “kill zones.”

A.F. Thornton

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