MARKET ENVIRONMENT: by Woody Dorsey.
Investors were hypnotized. An interim correction is underway. The profile preference was for a quick low and then to have a, “suck it up” recovery. I am looking for high sentiment and a completed timing pattern in the coming days to set up a more defined risk reward opportunity. This is a very unusual pattern in that highs and lows may come very quickly in sequence. Bouncing for now. The rally from Xmas was unusually persistent. If the Interim Trend is now down, it might also become persistent. Don’t get complacent on these bounces.
- Near Term Diagnosis: Sentiment is 72% Bullish.
- Interim Term Diagnosis: The Interim Trend has turned down. Minor recovery here still fits with that. Generic corrective behavior is due for months.
- Long Term Diagnosis: The next major Low is due in 2022.
MARKET TIMING: The Interim Trend has begun to turn down. The 1% Bullish on 5/14, fits with a recovery phase for a week or two before the next decline. This is a fluid tactical situation which I am evaluating day by day. There is a propensity for strength into month end but that does not have to materialize. Stocks may simply whimper about. Don’t become complacent.
SENTIMENT INTERPRETATION: The Dorsey Tactical Market Sentiment was generically optimistic for some time. The 91% bullish sentiment on 5/6 was the last gasp up. It tagged the 2930-2940 area as a key failure level. That is a great stop level. The 1% reading on 5/14 has generated an expected hopeful bouncing pattern.
The DORSEY Interim Market Sentiment was in extreme divergence for some time. Again: “The Bulls became dangerously comfortable. Negativity is a negative indicate in this phase.” This measure seems to be bouncing back but the emotional trend remains in deterioration.
MARKET SUMMARY: I repeat from last week: “You knew this market was on borrowed time. There was no reason to be nursing any significant long exposures. There still isn’t.” I allowed: “It would be typical for a low to occur near here and be followed by a hopeful “suck it up” recovery.” Still with Black Holes looming, if patience becomes procrastination, one may become remiss for not heeding the market message. Stocks will be going lower for longer than most anticipate. Allow these bounces to set up. Be alert.
Trading Instrument (Gary Uses) My Trading Instruments are all based off of SPX numbers, but for long side trades I use (SSO) the 2x leveraged etf that follows the S&P 500 and when expecting the market to move lower, I use (SDS) the 2x leveraged etf that follows the S&P 500, it moves higher when spx moves lower.
TECHNICAL VIEW by Gary Dean: Running off of Woody’s “It’s all about time” piece, timing is everything! We know we are approaching the “kill zone” but it still has a little time before we are there. The drop off the highs was a great break and I had 2 downside target-2810 and bear ugly 2722. The 1% sentiment reading combined with a test of 2800 and 5 clear waves down, had me moving to lighten up the position and see what plays out with a neutral bias. We are now some 80 points higher and for the most part, I am seeing more “where one should short this bounce” from other newsletters. That is hinting that one should be very patient when looking to short. The open gaps most likely will get filled (One got filled today) before the next larger move down starts-if history is our guide. 2931-2941 are the two other open gaps, so that gives us potential upside targets if the bulls continue to press higher. No guarantees with that!
The inverted head/shoulders pattern is really starting to show itself here. If you look at Tuesday’s road map in the premium members report, you will see this is exactly what was expected and projected. IF this pattern is in play, we should see a pullback anywhere from here or at/near the 2892/2900 level. That would form the right shoulders as you can see in the chart. I wouldn’t be looking to trade that move, because if I am going to be wrong, it will be to the upside–meaning we don’t make the right shoulder and continue higher. That is definitely not a go long signal-more of “whatever the market decides to do, is fine with me” Be patient and let the trade come to us-no point guessing or trying to pick top/bottom, because either way makes sense, which is Not a good trade set up!
The daily chart isn’t really giving us any new information. There is some resistance right here, but momentum is neutral as am I for now. Once we get into the “Kill Zone” and I see a trade set up forming, that is when we will have the odds on our side for a trade. Until then, be patient!
Summary: The bulls pushed back above the 2860 bull/bear line and now look like they are stretching for the 2892-2900 resistance. If the inverted head/shoulders pattern is in play, we should see a quick move lower to the 2850-2830 area to form the right shoulder before continuing higher (if they head higher) The gaps above are what has me thinking they will head higher at some point as we head into the “Kill Zone” So short term resistance is 2892-2900 and short term support is 2863/2850. Stay Neutral For Now!!
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