Special Bulletin: Oct 21, 2022

The Rally Attempt is Trying to Strengthen

That view is not widely held or popular right now. But while that may be so, the math of the market has improved ever so slightly and has caused our Current Market Outlook to be upgraded to “Uptrend Under Pressure” with a yellow light as of Friday’s close (10/21). Currently our “Core Four” (see top of page) sports 1 green, 1 yellow and 2 red lights.

While a new rally attempt is developing, the new signal is tentative at best. Since the longer-term direction of stocks is still down, just a couple days of negative technical action could quickly move our signal back to red. It will be very important for the stock market to not experience any Distribution Days (professional selling) over the next 3 days. This technical fact is deserving of your attention.

Two weeks ago, we wrote, “Even as the world seems to be on the verge of a collapse, and investor pessimism is rampant and souring more each week, the stock market is attempting to stop the losses and begin a new rally phase. … Yet, today’s action in the stock market was encouraging and indicated a possible change is under way in its character.”

Since that post, the initial rally attempt failed when the major indexes hit new price lows on Oct 10th & 11th. But then they snapped back immediately with a technical “positive reversal day” on Oct. 13th and began a new rally attempt. That type of violent action – testing and retesting support for a possible bottom – is typical during a bear market.

Even with that recent positive action, do not let your guard down. In addition to watching for distribution in the next 3 days, be very alert over the next 2 weeks for a major news event that could cause a serious financial disruption prior to the US elections. The CCP’s 20th Congress ends today (10/22) and could lead to an immediate, aggressive act on President Xi’s part against Taiwan. Additionally, liquidity around the world has been significantly reduced with the meteoric rise in the value of the US $, thereby putting enormous pressure on the current finances of many global trading partners (think looming default or credit crisis brewing under the surface). If either of those events (or some other black swan) were to emerge, the fledgling rally attempt in stocks would die immediately. In that event, the footprints of money would reveal an exodus from stocks and would force our signal back to red.

Friday was officially day 7 of a new rally attempt, and that falls within the I.B.D sweet spot for a “Follow Through Day” which is needed to confirm a new rally. Keep in mind a F.T.D. does not guarantee a money-making rally phase is ahead, but it does signal that conditions (institutional buying demand) have improved.

One more thing to ponder: Based on the remarkable rise in interest rates (and conversely the dramatic collapse in the long-term US Govt. bond price) could the Chinese Govt. be selling some of their massive, ~ 3 trillion, US Treasury holdings to destabilize things just before the mid-terms?

Game plan: Stay focus and begin to engage slowly in the new rally attempt. A move below 3,491 on the S&P 500 would kill this bravehearted rally. Freshen up your watchlists and remain hopeful… for a bear-market rally at least. Note: October has been known to occasionally usher in market bottoms.

Note: You can learn more about The Triumphant Core Four risk management system by clicking here.

Have a Triumphant day! ®