Let Us Examine the Larger Structure on the S&P 500 and Speculate About What It Could Mean

So far, the bear wedge thought has served us well, at least to the extent that it has produced a 5% drawdown for us. The basic justification behind the thought is essentially two-fold:

  1. The Fed’s tone is decidedly hawkish
  2. The yield-curve inversion points to the possibility of a looming recession

That said, we must also bear in mind a variety of other things as well:

  1. The bear wedge is only a hypothesis (it’s something I am imagining before it develops because I think it makes sense here)
  2. While the Fed’s tone is hawkish, its deeds are not yet (we only have one tiny hike and no QT yet)
  3. The yield curve inversion can (and often does) lead market tops by sometimes quite some time
  4. The breath thrust we had off the 2/24 low was about as good as the one coming out of the COVID crash low (could be a bear market rally, but it could be the real deal, too—we don’t know that yet)

So, in the spirit of not being dogmatic, I want to show you the larger structure on the S&P 500, because it is actually at a very interesting place. We can view the whole structure here as a beautiful, big flat:

SPY

It counts beautifully internally, and the fib relationship between these primary legs is one of perfect equality (between pink A and pink B) and it’s possible that we have completed a large, multi-month structure of consolidation. You can also probably see the “diamond-like” formation we can draw around the structure as well (especially if we extend that structure back to last September).

In other words, the market went straight up from the COVID low, and has—at least so far—consolidated for months and months and months. And so if we don’t break down very hard and very soon, it’s very healthy for a market that has gone straight up for over a year to do just that.

So, my short-term expectation (discussed the other day here) is for us to go higher. If we do that, but start really moving, let’s not be intransigent about the bearish interpretation: we must accept the fact that there are bullish outcomes available to us as well. If we start going up hard—if—it’s very possible for us to head back to the all-time highs from here.

One additional reason I am now more open to this interpretation is the news onslaught and the AAII sentiment survey that just came out this week. This kind of pessimistic news we have flowing right now (regarding the economy, China, inflation, war in Europe, etc.) is just the kind of environment out of which a most-hated rally can emerge. And the AAII bullish sentiment hit a 30-year low, which is hard for me to fathom. Lower than at any point during the GFC or the COVID crash. That is actually amazing.

In an environment such as this, we need to be accepting of the possibility that a powerful rally of lasting duration can develop.

Of course, I am making no promises here one way or another, but at this point, I don’t place as strong of a conviction on the bearish thesis as I did beginning at the end of March. I now consider both possibilities about equally possible and I wanted to alert you to that. Given the totality of things, I might even say I favor the bullish setup from this point (but we will learn much in this coming week).


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2 thoughts on “Let Us Examine the Larger Structure on the S&P 500 and Speculate About What It Could Mean”

  1. Adam Mancini also made a comment Friday about this being a multi-month consolidation zone since July 2021. The “relentless buying” observable through DIX for the past several weeks also jives with this. A few more stars need to align (NPD particularly) but the potential for massive upside is there.

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