SPX500 Monthly PATTERN reveals MASSIVE FEAR

Hope, fear and greed can be measured in many ways on Wall Street and we are told to "sell hope and buy fear" by the great investors, sages and textbooks of all time. It is difficult to buy fear and even more difficult to sell hope, since hope tends to go on longer and go higher than anyone can imagine. But the downside is more consistent and similar, as you'll see in the chart.

What I'd like to show you here with this chart is the price action of the US stock market in a unique way that shows "sentiment" (see the blue line labeled "RgMov" together with a price & volatility pattern that has many people nervous for the past couple of years. Sentiment as measure by the blue line "RgMov" peaked 2 years ago in August 2014 and has been declining in a significant way that is reminiscent of major stock market bottoms as in 2003 and 2009. Note the magnitude of the drop and the duration and severity. We have had many months where all or most of the price action has been on the downside, which makes people "feel" like stock prices are always having a rough time.

Compare this pattern of "psychology" which prevailed at the 1993 time frame and led to a sideways 1994 market before the bull market continued in 1995-1999. Note how the 1987 crash was the PEAK VOLATILITY event and then there was CONVERGENCE during the rally phase into 1994, for 7 years. Note also how the 2009 market was the PEAK VOLATILITY event and there was CONVERGENCE during the rally phase into 2016, for 7 years. Average True Range Percentage (ATR%) declined to its lowest level this month as it did back in 1993. People naturally get scared when volatility declines to a low level, as it has been "THE CALM BEFORE THE STORM" in the 2007 example, so analysts, commentators and investors are looking at this pattern and drawing the conclusion that we are repeating 2007 again.

I think we are repeating 1994 right now and if the right tax laws change as they did in 1994 where Bill Clinton reduced tax rates on start-ups to 15% and made the "internet tax-free" - we could see upside. In 2007, to explain why we aren't repeating that time frame, the Gov't slammed the breaks on bank lending by cutting bank leverage from 40:1 down to 11:1 which crushed real estate, lending and asset prices. I don't see that now or anytime on the horizon since we are at 11:1 leverage now. This time in the US is closer to 1993-1994 than 2007-2008.

October 23, 2016 9:29PM EST

Tim West

Comment:

Also, note 1982 where a smaller pattern with volatility expansion and then convergence to a low point combined with a price rise with converging trendlines and this 1982-1983 pattern occurred with extremely high interest rates and inflation. See if you can see the pattern on the far left portion of the chart.

Comment:

Here is the example from 1982-1983 that set-up a rally after an extremely low volatility level and a rising, narrowing and converging price advance.

Comment:

The Election provided probably the most extreme negative sentiment seen in the US in many years. Fear of the future and fear of an uncertain President Elect.

Comment:

When you read the "common financial press", you will see JUST HOW DIFFERENT my analysis is. So many analysts jump to the conclusion that "low volatility" is bearish for stock prices. You can see it is clearly NOT a simple pattern. Low volatility can be a precursor to Upside Movement, Choppy-Sideways Movement, and Downside Movement. There are FAR MORE FACTORS than just "volatility" all by itself.

I don't know why we as a people don't demand more "prove it" types of logic to back up claims, but the proof is in the future over many iterations.

I hope my charts and published comments are helpful and useful to you so you can profit in the financial markets.

Comment:

I think this chart is the most fascinating chart I have produced here at TradingView.

I know, I have published long term projections of the movement of the overall stock market many times with eery accuracy based on rational, logical back-and-forth tug-of-war between bullish and bearish factors in the marketplace.

What THIS CHART IS, however, is very different. This is PRICE-ACTION-INDUCED-SENTIMENT that can predict future price action. Using PRICE ACTION to PREDICT PRICE ACTION may seem logical to many of us chart-watchers, but it is not logical to the rest of the world.

What THIS CHART shows is the people were expressing their extreme bearishness by selling stocks, but all of the while stocks were not breaking down in price. What this means is that we completed a bear market at the recent low in November and even though we can't believe why a new bull market can start from "THIS LEVEL OF VALUATION" (we all hear this argument all year long), the market is saying that enough people are on the sidelines, out of the market and unless something changes dramatically, the sideliners will likely come back into the market over time and at least build a level of support at current levels.

Here's wishing us all many Happy Returns for 2017 and I hope you have been enjoying a fantastic 2016 with the variety of successful market calls this year.

Tim 12/23/2016 1:43PM EST

Comment:

The concept that goes into making the RgMov indicator is shown in this graph, which reveals plenty of downside movement in the market during the month, which led to massive short positions that built up over the past 6 months. I can theorize it will take as much "positive movement" in the market to overcome the significant negative movement, before the market balances out and then we can have the chance for a downside break. Any setbacks before we exhaust the upside movement should be buying opportunities. Sometime in Summer we should be out of "upside movement" which will set up a decline into year-end, which matches the 2017 Forecast I made in January.

Comment:

Correction: "Short positions that built up over the past 2 years!" Should have been my quote, not over just 6 months. Certainly they accelerated into the election, but there was plenty more shorting before that. See the large downside movement shown as large, yellow triangles = That movement is what creates bearish sentiment and then selling. They go hand in hand. Either can cause the other. (Bearish Sentiment, shorting or downside movement).

Comment:

Now that we've played out this chart pretty well since 2016 to 2022, similar to the 1994-2000 peak in stock prices (6 years later), we may need to strategize for how to best take advantage of the "trading environment" we might see for the next 10 years. If we are indeed at the top of a 10-year sideways bear-market, times could get pretty tough, especially when factoring in inflation (which reduces stock prices invisibly over time).

Secondly, thanks for the many likes since I posted this unusual chart. It seems pretty obvious that things aren't going well overall with huge budget deficits, huge Gov't spending, Russia attacking Ukraine (unchecked out of fear of nuclear threats), crude oil surging, natural gas surging as the world cuts off buying oil or gas from Russia and as interest rates surge as the Fed cuts off the easy-money policy out of fear of inflation. We also have inflation surging (mostly from Covid induced lock-downs and supply-chain delays which lead to over-ordering feedback loops). So all of these factors will all damage earnings for some time and create a great deal of uncertainty. This is a time to sit down and plan a bit more than normal. Each day I try to think "What can I do to help?" I don't have the answers but I do think about this each and every day. I also figure it is best to inform and then figure out the best opportunities.

I'll be in the "Key Hidden Levels" chat room each and every day to help pinpoint ideas, entries, news and emotional levels to help with our trading.

Wishing you all peace.

Tim. 3/26/2022 3:50PM EST