Special Bulletin: September 25, 2021

Watching for a Subpeak, or New Highs: The Question Mark Moment

This is it. For investors, the moment has come.

Monday’s sharp China “debt threat” induced sell-off, and the resulting 3-day lackluster-volume bounce in the key stock indexes, has set up a classic pattern and a “question mark” moment.

A current near equal balance of positive and negative market technicals, and the same (+/-) balance of economic fundamentals, has produced a particular technical pattern that can literally go either way – fast and hard – over the next several days. You don’t need us to list all those (+/-) things- just turn on a TV or look at your news feed. Perhaps that is why the stock market has been in a “sideways chop” trading range since late July.

The “?” pattern, easily seen on both the Nasdaq and the S&P 500 indexes, is sort of a “pit stop.” That means it is not yet the main event. Like John the Baptist, its role is to be a forerunner for what is greater and coming.

Looking at the index charts through an inverted basis, last week’s price action reveals a “first-thrust pullback” pattern, which suggests a continuation of the first thrust. These types of moves tend to last 5 days or longer (it has gone 4 already) and often reverse to head back in the direction of the original violent move (up or down). But it is not a guaranteed outcome.

If stocks move up in the days ahead, they will likely experience one of two technical price outcomes- hence, the question mark. First, a strong move up from here to new highs on robust volume would be seen as very bullish and set the stage for a positive main event. Second, a tepid move slightly higher into the end of the quarter that ultimately stalls short of a new high (creating a “sub-peak”) and then begins to descend rapidly would be seen as bearish.

There is a third possible scenario: the market immediately gets weak and fails to hold critical support at the 21 & 50-day moving averages and makes a dash back to Monday’s lows. In that sort of technical set-up, where the market is fighting from a weakening position underneath the key mav’s, a more significant pattern often develops called a “Nathan short” (named after our friend and former analyst, Nathan Birmingham, who originally defined that technical set-up for us). FYI: When a Nathan short plays out, it usually leads to a negative main event – a correction, or worse.

Ironically, with this moment of truth upon the bulls to “bid it up or go home” (a fancy way of saying “to put up or shut up”), our “Core 4” indicator just barely turned green on Friday. A VIX tiebreaker as of the 4pm EDT market close determined the outcome. (See more below.)

Our Current Market Outlook has been upgraded to “Market in an Uptrend” with a green light. Our “Core Four” now stands with 2 green and 2 yellow lights (see top of page) effectively causing a tie, which the VIX index (the tiebreaker) decides. Based on Friday’s VIX close, our light moved to green.

Even though the S&P500 held support at its 21-day and 50-day moving averages yesterday, the market remains at a critical spot and still needs a positive catalyst to drive prices much higher. Watch this weekend’s news closely. Immediate sharply negative price moves on Monday or Tuesday could quickly cause a downgrade in the Current Market Outlook.

In our strategies, we remain defensively positioned but with an eye to increasing equity exposure if the rally builds properly in the days ahead.

The previously promised discussion on certain defensive tools and techniques – e.g., equity inverse and interest rate ETF’s, adjustable-rate investments, and inflation hedges, is still forthcoming. We apologize for the slight postponement.

What to do now? Freshen up your watchlist and only invest new capital in stocks that breakout with a significant increase in volume. Continue monitoring the US 10-year note rate as a “taper tantrum” tell. Stay vigilant watching for a vertical violation. 

Have a Triumphant day! ® 

Ps. Congratulations to the St. Louis Cardinals for making franchise history with their 15-game win streak today! My blood has been Cardinal red since 1973.