Yesterday around 2 PM the bulls started what is now known as the second largest point gain (91.6 points or 10.8%) on the S&P 500 (SPX) since its formation in January of 1962 – 46 years. The brief discussion this morning will relate to our recent articles relating to short-term bottoms in bear markets – secondary counter-trend bull rallies – and what to look for and… the ultimate question “Is this it?”

A pair on the flop, trips on the turn and quads at the river; what more could you ask for when evaluating the risk/reward of a potential move?

In our humble opinion, yesterday’s action concluded all the necessary ingredients (technical & contrarian) to this Halloween’s witch’s brew that will begin the equity markets’ next stage and is precisely what we’ve been purposing may occur. It’s not to say we blatantly called an “All-in” when this began yesterday, but given the circumstances, we pushed enough into the pot to make it well worth the possibility and potential benefit.

Since the October 10th low – the “panic” Friday before the 9% Monday gain – the SPX has been technically forming a descending triangle (a bottoming pattern). The challenge with this pattern is that if the bottom is broken then it becomes a “continuation” pattern which can be indicative of a half-way point. Could you just imagine – half way?

Needless to say yesterday the SPX pushed topside of this declining wedge formation with better than average volume. This was the cherry on the cake! So lets step back and take a quick look at our “Weight of Evidence” and what makes the current success probability so high.

We’ll start with the contrarian points; otherwise stated, the overwhelming negative sentiment rampant throughout the equity markets.

1. Consumer Confidence Index at a record low – 38

2. Public short-sales at the highest level in over 5-years

a. Sorry, but the public is traditional wrong

3. Put/Call ratio hitting 1.95 (widespread put buying)

4. Mutual Fund redemptions approaching all time highs

a. Lagging number – probably much worse for October

5. P/E Ratio for Dow Jones Industrial Average – ZERO!

a. Yes, that is correct!!!

6. Dividend Yield of the Dow is at the highest level in 5-years – 3.75%

7. Bulls vs. Bears – largest spread in years – 22% to 55%

Moving right along – lets talk technical!

The upward completion of the aforementioned technical pattern, a descending triangle, was wonderful news for the bulls but it’s the underlying momentum and other secondary indicators which make this bottom more probable to hold, in the short-term.

Quads at the River

As most ‘Morning Cup of Jo’ readers know, our technical aptitude on determining market tops and bottoms comes from our 100-Year Market Theory and divergence analysis where price travels in one direction as other secondary indicators are indicating the other. In this instance, as seen in the graph above, we have Quads!

1. Volume divergence

a. As the latter half of the descending triangle was being formed the volume dried up – especially on Friday of last week and this past Monday where the closing prices were the lowest of the year. “Price Divergence”

2. Stochastic divergence (my personal favorite)

a. Yesterday confirmed a stochastic cross with higher lows while, at the same time, breaking a downward trend.

3. MACD divergence

a. Again confirming a divergence and a positive cross back above zero on the histogram.

4. RSI divergence

a. The relative strength index (not to be confused with a benchmark RSI comparison) also broke a downtrend and completed a divergence.

The Risk/Reward entry, in our minds, is very favorable with the understanding that this will only be a “Bear Market Rally” rather than the final bottom. It is way too early to project, with relative certainty, that stance. We are looking for this bounce to travel, at minimum, to the SPX 50-DMA. If for some reason – Federal Reserve Announcement today – this rally was to fail and break the recent bottom; well…… Look Out Below!!!! Hence, keep your stops tight and your sell tickets close.

Stay tuned & good luck!

Until next time…

Tuttle Asset Mangement Team

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