I was a bit disappointed that we finished in the middle of the range today after the Fed announcement. That puts my guard up just a bit, especially with the sloppy, choppy behavior around 4400 the past four sessions. 4400 also is the weekly open and a big round number. Granted, the market parabolically climaxed at the highs on Friday and Monday and needed a rest. But the expanding triangle visible on the daily chart could be a short-term topping pattern.
Also, just because the 18-month cycle may have troughed on July 19th does not mean that the next 18-month cycle will be bullish. If July is a positive month, that will be seven in a row, which has not occurred since 2010. Notably, 2010 followed a significant bear market low from March 2009, just as we have from March 2020. In 2010, the market peaked its parabolic run off the 2009 bear market low in September and then went into a trading range for a few months.
An 18-month down cycle is my least likely scenario, but I take nothing for granted and want to continue to use the 5-day line as our stop. We do head into potential seasonal weakness in August and September. Eviction moratoriums and Extended Unemployment Benefits expire in a month. There are problems and rumblings in China related to government crackdowns on public companies and a potential real estate and banking crisis. There are rumors that China may devalue its currency – which would not be positive for the U.S. and Europe. In fact, the most likely scenario that would resolve all of the market issues is a trading range of 5% to 10%, like we saw in the fall of 2010.
A trading range would allow for seasonal weakness, support the continued sector rotation, and it could keep the bull market trend alive by sustaining the next 18-month cycle, but at a more reasonable slope. If the July 19th low at 4224 is taken out shortly (not something I anticipate), we would conclude that the 18-month cycle low is not yet in place. If it is taken out in a month or so, perhaps the next 18-month cycle would be bearish.
As you will see from the chart below, today, we sold off from above yesterday’s high but bounced from a small double bottom at the EMA. Then, as anticipated, we entered a trading range before the FOMC meeting, which was a triangle. There was a failed bull breakout and then a weak selloff into the 2:00 pm EST FOMC announcement.
We saw a major bull candle on the announcement, so either a trading range or bull trend was likely for the rest of the day. A weak rally ensued, then reversed from a new high for the session, affirming today as a trading range day.
A.F Thornton