BluQuant Oracle Weekly - 5/9/2022 | Archimedes Methodologies

Last week saw another bear candle that closed on its low, just above the February low.
When viewed from the January 3rd peak, the weekly candle dipped into new low territory but snapped back and closed inside the 9-month range.
For the most part, last week became a trading range week, with the S&P 500 closing almost unchanged.
Once again, volume increased over the previous week. The higher volume failed to drive prices significantly lower, so the result is more like stalling action, a slight positive over the prior week.
It is an excellent time to mention the range bottom and line in the sand at 4100. We predicted this level back in 2010 as the price likely to coincide with a significant top. It is the 4.236 Fibonacci extension of the 2009 bear market low.
It is not surprising that the level provides support, but the market looks even more bearish below it. That hasn’t happened yet.
We have the inflation reports coming up mid-week and monthly options expiration a week later. Both of these events are likely to bring us a bounce from highly oversold levels accompanied by the record and negative investor sentiment.
The VIX and Dow Transports are not supporting the current lows in the Dow or S&P 500, creating a divergence, another slight positive. The momentum on the hourly charts has been rising on the last three swing lows, another slight positive.
Another reason to look for a reversal back up soon is the market dipping into its nominal 80-day cycle low. The variance for the trough is roughly two weeks. Since we cannot get more specific, note the cycle bounce due in late May to early June.
Bears want a decisive break below the February 24 low which is the neckline of the double top bear flag, and a measured move down towards 3600 based on the height of the 9-month trading range.
The bulls hope that the sell-off in the last five weeks was simply a sell vacuum to test the February low.
Mission accomplished if it was a vacuum test. The market could find its rebound low this week.
Bulls see a wedge bull flag (Jan 24, Feb 24, and May 2) and want a reversal higher from a lower low trend reversal and the wedge pattern. Count me in this camp.
However, the selloff from March 29 has been extreme. The bulls will need at least a micro double bottom or a strong reversal bar before the bull crowd would be willing to buy aggressively.
The reality is that traders need more information, therefore more candles. The S&P 500 index may have to go sideways for another week or two before traders decide whether it will break below the 9-month trading range low or reverse higher.
If you think about it, the S&P 500 Index has been dancing around 4,400 for 9-months. That price might well form the middle of the new trading range. (See our “Current Stock Market Thesis“”) harping on this point since February. Since the top of the range is about 400 points higher, the bottom could be 400 points lower. That is below the February low and around the 4,000 significant round number (the approximate WEM low this week).
Since our formal Sandbox is the WEM range between 3986 and 4254, I am not concerned about anything outside the range. I am primarily concerned with what we encounter inside that vast volatility range expected in the week ahead.
I have, once again, overlayed the 2000-2003 bear market on the chart above. Current prices have been uncannily tracking the old bear.
And that bear would see a trip down to the 4000ish area, where we encounter the largest concentration of Gamma and outstanding options.
The Gamma and prominent positions can provide significant support for a reversal.
Given the cycle trough, seasonality, overly bearish sentiment, oversold levels, developing positive divergences, and 2000-2003 bear market tracking, I will be looking for long positions at or around 3800-4000, but looking and buying are not the same.
I need confirmation of a turn – but that is where I will be looking for it.
Interest rates continue their climb, pushing the 10-year up to 3.22%.
Remember my prediction in the 2022 outlook in January?
I predicted these levels based on the head and shoulders reversal pattern.
Here we are, but even these rates should retrace a bit soon.
The rising rates are at the root of all of this trouble.

We published the chart above on January 22nd of this year as part of our 2022 outlook. It is even hard for me to accept that my prediction came true. What an unbelievable reversal of fortunes.

And here we are at this writing, with the yield tonight at 3.22%, just below the 3.25% prediction from January. How is that “transitory” inflation working out for everyone now? What a bill of good our government has handled all of us.

Conclusion

Until rates peak and the US Dollar stops rising – all doubts about the stock market must be resolved bearishly. It is an unusual time. It is rare for stocks and bonds to fall together. One usually offsets the other.

Imagine the carnage in pension funds all over the country tonight, and the increase in unfunded liabilities when a balanced investment strategy fails as is happening now. As I keep saying, it is only a matter of time before the bodies start floating to the surface.

Nevertheless, the street once again is lopsidedly short and we will continue to see rip-your-face-off short covering rallies in between the slow and methodical bear drips. A rally as such is due very soon. I would not try to short here, and I would be very attentive at the WEM lows this week around 3986.

A.F. Thornton

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BluQuant Oracle Weekly – 5/9/2022