Issue Number 0973 – 02/28/2022
The Navigator Oracle™ is BluPrint Quantitative Strategies’ signature publication. The weekly forecast is available Monday mornings free and can be sent directly to your email if you register here. Subscribers receive the Oracle on Sunday morning, along with essential updates during the week and live access to swing trading signals initiated by the BluPrint Founders Group.
Whether or not a long-term bear market is underway, the 2/24 retest of January’s low was successful, and the low should be secure. By most measures, the retest has all the hallmarks of a critical swing low. The secure low does not tell us how far the market will rally – but even a bear market rally can be significant, especially as traders panic to cover short positions.
Large-cap growth stocks may struggle some more as the broad market begins to either base in a trading range or move out of this corrective phase to new highs. But global tensions respecting Ukraine and Taiwan are significant and unpredictable wildcards to even the most prescient forecast.
In this issue, we will revisit our longer-term thesis, review the status of the Navigator Algorithm, and travel through our checklist of relevant technical indicators.
Navigator™ Algorithm – Current System Status
On Friday morning, the Navigator Algorithm flipped to a preliminary swing buy signal at 4192.25. The call followed and confirmed a lower time-frame buy signal for day traders on Thursday morning’s hourly chart at 4192.25.
Day traders close out their positions at the end of each day, mitigating the risk of adverse overnight developments. But swing traders would have been required to hold any acquired positions over an entire weekend.
With the Russia – Ukraine conflict in full gear, we decided to wait until Monday to issue the buy signal (if we do so at all). Not even an algorithm can escape the volatility and news related to the current conflict. However, the market have reacted more favorably than expected as the negative news keeps flowing from the Eurasian theatre.
Looking at the daily dashboard on the first chart above, The Navigator Algorithm™ set the first stop level at 4371 and the second at 4127. These are dynamic levels that change with price. With trailing deltas running at 156.8, the lower stop gives the price action more wiggle room.
A lot of energy has already been released, so fractal gamma (energy) is neutral after the last two daily bars. We will revisit stops if we take the buy signal.
The Founders Group would be considering a 25% long call spread for its swing position on the buy signal. The spread reduces risk and reduces vega (the risk of a volatility crush). If we proceed with the trade today, we will carefully evaluate market conditions if 15-minute candles start closing below the stop to exit.
As I often remind subscribers, the algorithm gives us the buy or sell signal, but it does not tell us how far the market will move after the signal. We set the targets with Fibonacci math and other objective measures, depending on context.
Our first target would be 4400, then 4435, then 4470, and finally 4585. The Founders Group would evaluate market conditions for taking all or partial profits at each target. We would look to the hourly Navigator Algorithm to guide us short term.
Thursday and Friday were the easy moves. The index will encounter significant resistance above Friday’s close.
The trend state is still strongly bearish at 34.3. We remain in a short-term downtrend and kill zone. The market did manage to close above the 5-EMA Friday, which is positive. But we may be working with a bear market rally, rather than continuation of the bull trend. Only time will tell. We discuss whether or not the Thursday 2/24/2022 intraday low is secure below.
Weekly Stock Market Forecast
Last week’s theme was “sell the rumor buy the news.” The chart immediately below was the prescient chart of the week, presented in an alert on the eve of Russia Invading Ukraine last Wednesday evening:
This week’s theme is “follow the leader.” We discuss our confidence level in last week’s swing low, the extraordinary influence of the options market, follow-through, and small company leadership developing in the Russell 2000 Index (IWM). We will finish up with our weekly checklist.
Press Here to Skip Down to Current Conditions
Background and Context
Our current thesis is that the U.S. stock market (we use the S&P 500 cash index as our proxy) has started a generational correction that will end at its long-term mean. The mean is roughly the halfpoint in its 100-year channel – currently 2500. The level is in the same neighborhood as the 2018 lows, but slightly above the Covid-19 crash low at 2100. Of course, the mean rises over time, so time and price are both elements of the downside target.
The S&P 500 cash index peaked at 4818 on January 4, 2022, also the intersection of a multi-timeframe channel top and three standard deviations above its long-term mean. Our thesis would be negated if the index found acceptance at new all-time highs.
This backdrop distinguishes the road ahead from recent bull market experiences, corrections, and tactics. The stock market has tagged the 100-year top channel line only three times: 1929, 2000, and the recent January peak. Recency bias can be fatal as a new bear market unfolds.
If the past is prologue, this will not be a buy-and-hold market. Rallies and declines will occur swiftly, and both traders and investors must apply appropriate tactics to produce consistent profits and avoid losses.
From a technical perspective, tagging the 100-year channel top is a “three-sigma” event, driven by unusually accommodative Fed policy leading to excess speculation. The last two touches culminated in bear markets with declines exceeding 50%. BluPrint’s working thesis calls for similar corrective processes in the coming weeks and months.
From a fundamental perspective, traditional valuation models also support mean regression. Using the S&P 500 index Price/Earnings as a measure, the ratio is 76% above its historic average. Readers can track multiple market valuation measures using these additional resources.
Potential Bear Market catalysts include high inflation, a related reversal in accommodative Fed policies, the risk of Fed policy errors (inducing a recession), and rising global tensions, including the Russia – Ukraine conflict. The entire world is experiencing secular upheaval, challenging the existing international order. The disruptions are characteristic of “Fourth Turnings, ” which we have previously discussed on these pages.
Projected Path and Targets
The stock market can travel along several different paths to correct its excesses. It can crash, zig-zag, move sideways, or combine all three. Crashes are low probability events – more often associated with unknown and unexpected circumstances.
The market is more likely to establish one or more trading ranges as it works its way to the mean. The mean can rise while the market moves sideways until the mean and price meet. The process can take a long time, even years.
The Dow Jones Industrial Average chart above highlights the various corrective paths the index has taken over the past 100 years in gray. Of particular interest is the Dow Jones Industrial Average behavior from 1966 to 1984. That segment of the long-term chart is magnified below and documents the index’s regressive price behavior in the last U.S. inflationary spiral:
The past week was extraordinary. Thursday and Friday saw parabolic rallies off the 2/24 swing low. The quick and parabolic price action generated a Navigator Algorithm swing buy signal. however the signal is on hold for the weekend until we can evaluate conditions on Monday. We need to look at the weight of the evidence and consider recent global tensions before we jump in with both feet.
Is Thursday’s Swing Low Secure?
The simple technical answer would be yes – were it not for very serious and unpredictable global events. Let’s review our usual MGI checklist and then we will draw some conclusions.
The short-term trend remains bearish. While the market broke up through and closed above a secondary downtrend line on Friday, the futures gapped down tonight (Sunday), returning prices below the line and break. Price also remains below the primary downtrend line from the January market peak. How the market opens Monday morning (also the last trading day of February) will tell us more about the runway ahead of us.
The longer-term trend is still bullish. Price closed above the primary uptrend line and inside the ‘best fit” price channel tracing back to the March 2020 Covid Crash.
From a trend perspective, the price action supports Thursday’s low as secure. However, the news-driven sell-off in Globex tonight has the Covid rally uptrend hanging by a thread.
✓ Chart Patterns
The market reversed from an “h” pattern and an even more rare “piercing pattern“, both of which are bullish outcomes. According to the Pattern Website, the piercing pattern has a 65% follow-through rate, which is among the most reliable market reversal patterns. Friday’s candle also bullishly “swept” up and through four daily bear candles.
The bullish chart pattern resolutions support the 2/24 Thursday low as secure.
✓ Moving Averages
The moving averages slope down and remain stacked negatively, which is bearish. The price closed above the 5-EMA Friday, which is a step in the right direction. The market must hold the 5-day line this week to stay bullish.
The bearish position of the key daily chart moving averages does not support the 2/24 Thursday low as secure. Additionally, the price remains below the 21-week average (mean) which continues to be resistant to any advance.
Sentiment supports the 2/24 low as secure. There are many measures I could quote to confirm this, but one of the best remains the CNN Fear/Greed Index:
Many other measures of fear exceed their March 2020 Covid Crash peaks. When fear is this high, most sellers have exited the market, leaving buyers with a lot of cash on the sidelines. Sentiment supports the 2/24 low as secure.
The correction at hand started almost a year ago in the broad market, using measures such as the Russell 2000, or NYSE index. The large-cap stocks, many of which are represented in the Nasdaq 100 and S&P 500 Indexes, are the last to correct and may still be correcting.
It is not surprising then, that the broad market would be bottoming ahead of the generals. We see that reflected in the positive breadth divergences at the 2/24 low.
The NYSE has clear, positive breadth divergences at the 2/24 low. There were fewer net new lows than January, and the number of stocks below their 50 and 200-day lines contracted between the January and 2/24 low.
As mentioned, the S&P 500 index did not enjoy the same positive divergences in members above the 50 and 200-day lines. We will need to keep a close eye on these differences, but for now, it evidences to me that the generals are still basing and correcting while the soldiers are beginning to advance.
The positive volume divergence is another confirmation of the February 24th retest low as secure. Spike volume is often associated with intermediate lows, and the January low was no exception. On the piercing low retest, volume was spiking but significantly lower than the spike volume on the January low. The behavior is but another positive divergence solidifying a successful retest.
Friday’s market and volume profile shows both the point of control and value area gapping significantly higher. This is characteristic of an important auction low.
The profiles support the 2/24 low as secure.
We could provide many examples but will focus on the RSI indicator. The RSI came in higher as the market put in a lower low on 2/24. This is a positive strength/momentum divergence:
Whether or not a long-term bear market is underway, the 2/24 retest of January’s low was successful and, by most measures, has all the hallmarks of an important swing low. Even so, we don’t know how far the market will rally from here.
The caveats are that the large-cap growth stocks may struggle some more as the broad market begins to either base or move out of this first corrective phase. Also, global tensions respecting Ukraine and Taiwan are significant and unpredictable wildcards to even the most prescient forecast.
Finally, there is evidence that we are starting something more significant than a bull market correction. A generational bear market could be unfolding. If so, the next decline in the sequence typically exceeds any previous bull market correction. There are plenty of catalysts at hand to eventually drive the market below the 2/24 low.