The Market has its own Timing

The price action in the Markets during the next trading week will be very meaningful. The rally that started on July/15 closed last Friday with a gain of 591 points in the S&P 500, despite of the pullback. The force of the Bulls after this multi-week rally will be put to test with the selling pressure that is entering the Market. If the demand can absorb the supply and keep the S&P 500 above 4,100 there is a chance that the rally can continue.

Market Overview

Two weekends ago I was warning about an imminent pullback that didn't actually happen back then. The Market has its own timing and it's until now that we start to see the Market declining. The most interesting part of these ups and downs is who will win the battle, can the Bulls keep the rally alive? or will the Bears stage an important decline or at least make the rally stall?

Usually I show the New Highs and New Lows (NH-NL) data towards the end of this section, this time I want to show it at the very beginning since the bullish force has disappeared in this leading indicator. The Monthly columns (G, H, and I) are the ones that move faster from the ones I track. During the rally there were multiple times where the Monthly Highs got almost to two thousand New Highs, that's a lot of tickers making it to higher levels. For the last trading day Aug/19 there were only 277, there were even more New Monthly Lows 454. The numbers aren't that important, however the balance is. More companies making New Lows for the past month than New Highs.

At the end of the day, some of those companies making New Lows and Highs are part of the indexes that we track. In order for those indexes to keep rallying there have to be more companies making New Highs than Lows.

Reviewing the weekly chart of the S&P 500, we are at a key point if we consider the +1 Keltner Channel (KC) as a reference. If we go back in time to 2019 the +2 KC was the limit that the S&P 500 weekly chart wasn't able to break.

Then in 2020 and 2021 after a quick recovery after the impact of the virus, things got crazy and the demand kept the weekly S&P 500 at overbought levels (+3 KC or above) for a very extended period of time. The +3 KC became a normal place to be during those couple of years.

Now that the Bears took over the control and during the last month there was a recovery staged by the Bulls, we are right at the +1 KC which for 2022 looks like it could be acting as a resistance. There are no rules about these levels, the Market can decide to break them at any time any year. However, at some points the chaotic Market ends tracing some patters that remain reliable for a period of time until the Market decides that it's time for chaos again.

Whatever is the Market's final judgement we can extract some clues out of it. If the rally continues and breaks decisively past the +1 weekly KC that will be an interesting display of bullish force. If the S&P 500 stalls at that level then the Market is still deciding, the forces between Bulls are Bears are more or less even. If the Market starts a sharp decline the Bears aren't done yet, the beginning of a powerful multi-month Bull Market might still have to wait a little bit more.

In shorter timeframes it's always harder to predict what could happen next. The good thing is that trading doesn't have to be about predicting, especially if you are a trend trader. I don't see many interesting clues in the daily chart at this point. We know that the rally didn't have an issue breaking past the 4,200 resistance despite being at an overbought level, however 4,300 was a strong enough to at least generate a small decline.

The 4,300 area has a lot of volume around it during the last couple of years (horizontal black dotted arrow). It will be a good test for the Bulls to see if there can be enough demand to break past that level. If the Bears are stronger during the next trading week, then at least it will be an important reference level if the Bulls can stop the decline and keep the index above 4,100.

Industries

In terms of strong Industries, there isn't much change from the past weeks. From the 68 Industries that compose the Global Classification Standard (GICS), there are three that I would consider strong. Unfortunately, from those three, two of them are in defensive Sectors. That doesn't signal a great appetite for risk.

I will continue monitoring them on weekly basis, eventually there will be a few Industries that will lead the way of the new Bull Market. Those Industries might even have a strong rally a few weeks or months before the actual Bull Market actually starts.

One of those potential Industries is 'Construction & Engineering', the weekly chart had an interesting breakout. It doesn't mean anything yet, tracking the potential candidates that could lead the next Bull Market could be a rewarding endeavor with the proper timing.

Scenarios

Scenario #1: My personal point of view is that the rally will stall, the pullback might continue but not a sharp decline. The reference level that I'll be tracking is that the S&P 500 doesn't decline below 4,100. Below that level I'll have serious doubts that the rally can recover. In this scenario where Bulls and Bears would basically have similar forces, we would need to wait longer for a clear Market direction. This scenario would raise doubts about the bullish dominance that we saw during the last months.

Scenario #2: The second most likely scenario would be that the pullback continues. For that to happen, the selling pressure would need to continue increasing, the greed that we have seen since mid-July starts to fade and the fear takes over the Market again. If the Bears can close below 4,100 with force then there's a chance that it's still too early to think about the next Bull Market.

Scenario #3: In this scenario the rally continues, I don't see this very likely. First of all because the Market displayed some fragility with the latest news about comments from one of the Fed Presidents mentioning that there's no intention, in the near future, of slowing down the rate hikes. Second, the index would be again at overbought levels where it recently displayed weakness. At this point, the continuation of the pullback or a sideways movement could create a healthy base for the continuation of the rally.

Summary

Since July/15 we have seen the Market go up until reaching overbought conditions. Now the rally is showing some cracks and the Bulls will face some increasing supply, if the demand can't absorb the selling pressure, the pullback will continue. The pullback at this point is a healthy part of the process if the rally is to continue.

As long as the S&P 500 keeps its level above 4,100 the Market still has a chance to continue on its way up. The last couple of weeks the timing of the scenarios I have judged as most likely have been off. They are actually happening but not when I thought they would. The Market has its own timing and it's very important to be prepared for whatever scenario the Market throws at us.