Yesterday’s sharp recovery above Mon’s 4723 high and our mini risk parameter resulting from Mon’s bearish divergence in short-term momentum discussed in Tue’s Technical Blog obviously nullifies that divergence and chalks up this week’s relative swoon as another correction. Overnight, the recovery followed through to poke above 22-Nov’s 4741 high to establish a new all-time high in the S&P contract. We reference this “new high” this way because the S&P is the only Index that achieved this feat. The Dow and NASDAQ remain a ways away from their respective Nov highs.
This divergence in performance, at least thus far, may or may not mean anything at this juncture as long as all of these indexes continue to recover and sustain trendy, impulsive behavior higher. With respect to the E-Mini S&P 500 contract, yesterday and overnight’s recovery specifies Tue’s 4596 low as the latest smaller-degree corrective low this market is fully expected to sustain gains above per any more immediate bullish count. Its failure to do so, which would likely be accompanied by still-flagging price action in the other indexes, would contribute to developing concerns for a larger-degree correction or reversal lower.
In this regard, this 4596 low serves as our new short-term risk parameter from which shorter-term traders can objectively base a resumed bullish policy. This said however, reestablishing bullish exposure “up here” against the extreme upper recesses of the past month’s range present poor risk/reward metrics. Rather, we advise waiting for a smaller-degree 3-wave corrective dip for a preferred risk/reward punt from the bull side. We will be watchful for this in the days or even hours ahead and will update accordingly.
Taking one step back, the daily log scale chart below shows the past couple weeks’ recovery from an exact 50% retrace of Oct-Nov’s 4260 – 4741 rally and a general 4550-area of former resistance-turned-support. Against the backdrop of the secular bull trend and especially after yesterday’s impressive rebound, it would be fair to conclude that 03-Dec’s 4492 low defines the end or lower boundary to another correction within the secular bull trend ahead of further and possibly steep gains. A failure below 4492 would, in fact, negate this specific call and expose a larger-degree correction or perhaps a major reversal lower given some sentiment/contrary opinion indicators we’ll discuss below. Per such, this 4492 level becomes our new key longer-term risk parameter from which longer-term institutional traders and investors are advised to rebase and manage the risk of a continued bullish policy and exposure.
Stepping back still further, clearly, the market has yet to provide the weakness necessary to even defer the secular bull trend, let alone threaten it. Again, minimum weakness below 4492 is required to raise this threat. However and as recently discussed, historically frothy levels in the Bullish Consensus (marketvane.net) that haven’t been seen in nearly FOUR YEARS amidst waning upside momentum are acknowledged threats that question the risk/reward metrics of a longer-term bullish count from current levels and conditions.
Potentially countering our deferring these threats is the fact that the American Association of Individual Investors (AAII) Survey has eroded from a frothy 48% to a low 25% over the past five weeks. We saw this same behavior in Sep that ultimately meant the month-long setback from 4550 to 01-Ot’s 4260 low was another correction within the secular bull. IF Nov’s setback is to prove a similar case, then the market would/should be expected to sustain trendy, impulsive behavior above at least 4596 and certainly 4492. This identifies the RISK of a bullish policy and exposure specifically and objectively.
Finally, from an even longer-term monthly log scale perspective, the chart below shows the massive secular bull trend as well as current equity and equity-to-cash portfolio levels that haven’t been seen since Jan’18. These conditions led to a roller-coaster year that year that ended up with a 21% correction. Along with other threats to the bull like the Bullish Consensus and waning upside momentum, it is this historic portfolio equity exposure that makes it so crucial for the market to sustain the simple uptrend pattern of higher highs and higher lows. Its failure to do so will bring these bull threats to the forefront of our analysis and warn of a larger-degree correction or reversal lower. Herein lies the importance of the 4596 and 4492 corrective lows and risk parameter specified above.
These issues considered, a bullish policy and exposure remain advised for longer-term traders and investors with a failure below 4596 raising the odds of a sub-4492 momentum failure and a failure below 4492 requiring a move to the sidelines to circumvent the depths unknown of a bigger correction or reversal lower. Shorter-term traders are advised to return to a bullish policy after getting whipsawed on Tue’s momentum failure, but we recommend waiting for another corrective setback that is stemmed shy of 4596 for a preferred risk/reward buy rather than “chase” bullish exposure up against the 4723-to-4741-area resistant cap to the past month’s range.