The market closed sandwiched between the 5-EMA and the Weekly Expected Move low, as you can see from the S&P 500 Index Futures chart with 24-hour daily candles immediately below. The four-day consolidation looks like a triangle bear flag for one last downthrust or fifth wave. We closed in the middle of today’s 24-hour candle. Typically, this indicates that the bulls and bears had equal power today.
However, we closed near the bar’s low if only the regular day session is included, indicating that the bears still had an edge (see the SPY chart below).
But there are signs of life. Each low in the regular session since Monday is higher than the previous low, as seen in the SPY chart above. Many sentiment measures are now at bearish extremes – which is bullish.
The American Association of Individual Investors’ bearish sentiment is as high as the China Virus crash, as reflected in the red histogram bars in the chart below. The bears have increased each day for the last four sessions – a bullish sign. I have recently discussed other sentiment measures, also at levels generally associated with an intermediate low.
Tomorrow is the 5th day out from Monday’s low – where a retest usually turns. And while the price pattern looks like a bear flag to go lower, I have seen many a bear flag fail at similar junctures, giving us a rip-your-face-off rally late on a Friday afternoon. The rally ensues because the bears keep loading up on puts near the lows of the last few sessions, betting that the market will go lower.
As we saw almost two weeks ago, when the market fails to deliver new lows by Friday afternoon, it can be like a match thrown on gasoline. The shorts all head for the exits at once near the close, buying to cover their poorly located positions and giving us one of those rips higher. Remember, all intermediate turns start with short-covering.
Another sign that we are getting close to a trough – new lows did not expand as much as they did in Monday’s spike low, even though we had a new closing low on the cash index today. That is a positive divergence, indicating that some buyers have arrived. You see the same positive divergence across all the major indexes in the chart below.
After the close, Apple reported positive earnings and guidance and popped higher. Given its cap weighting in both the S&P 500 and Nasdaq 100 – as goes Apple, so goes the market.
In short, the bottoming process is underway, at least short-term. The Navigator Algorithm is on a buy alert, and a buy signal could be close at hand.
Let’s see what tomorrow brings.
A.F. Thornton