Before I begin discussing my thoughts on the present stance of the Market, I’d like to review a few points Terry Laundry made in his “1997 Introduction To T Theory”, relating to the Short Range T’s which he discovered in 1996. These Short Range T’s use Volume Data to find periods of 6-12 week Time symmetries. They are what we now call Volume Oscillator T’s.

There are rules which Terry points out in his paper, and I follow most of them. Quoting directly from the paper:

First, the Center Post Low of any new T must lie to the right of the last T’s projected peak so that the market has the opportunity to decline to a full oversold condition at the Center Post of the next .

Second the Center Post of the new T must be free to move forward in time to reflect the market’s natural ability to adapt to new fundamentals while maintaining the basic time symmetry between a specific market rally and its prior Cash Build Up Phase.

A third observation warns of potential pitfalls in applying these Ts. History shows the gains within the right side of the successive T are unusually variable. Generally the market does well after the downward sloping Cash Build Up line is cut to the upside as long as the market is projected to still be headed high by the more significant Long Range Advance-Decline Ts. During the bear markets that separate these bullish periods, the projected rally tends to be failure prone or erratic at best. This just goes to prove the old saying “you can’t make a silk purse out of a sow’s ear”. In other words, a projected advance in the right side of a Short Range T will not materialize as expected if the key technical and fundamental ingredients are not in place.

The most important technical ingredient to insure success in any new Short Range T is an oversold market condition. The most important fundamental ingredient to insure a good rally in the right side of any new Short Range T is prospects for declining long term interest rates. This is usually defined as the yield on the 30 year bond.

As you might expect, the period of Cash Build Up in T Theory would normally be expected to take place in an environment of rising long term interest rates since stock investors look to long term bonds as a normal investment alternative. High or increasing bond yields therefore might be expected as part of the cash asset buildup process

A 1997 Introduction to T Theory Copyright 1997 by Terry Laundry

Those first two rules are imperative to follow as they are stated. The prior T must end before a full oversold condition can be created to create a new one. You may find a shorter T within that first one, but you shouldn’t create a T that goes beyond the closing date of the larger T.

That last paragraph offers an explanation as to why I note that I follow most of Terry’s rules, and why I must include my personally developed tools (in addition to looking for confirmation with the A/D line). It should become immediately clear that Terry felt these short T’s would be less effective during a period of rising rates, and at the time of the paper he was not utilizing T Theory on bonds. Over the course of the last 6 years, I have shown here and elsewhere that these separate interest rate T’s can be traded successfully. (You can find those T’s in the Completed T section of the Charts page.) But they do affect the landscape of equity T’s, because they can become rivals for equity asset funds.

I began using T Theory for myself after Terry passed in 2012. We have been in a special interest rate environment for most of that period–

This period of declining rates started many years before the above chart, but 2008’s deep drop in long term rates created the background for my creation of the Andrews Pitchfork chart in 2015. It followed this path until the beginning of 2022. Finding short term T’s was ‘simple’. There was no alternative for the returns on stocks, as the returns on bonds yields were diminishing over that period.

With the advent of higher rates, I’ve needed to project a longer term view regarding if the period of lesser returns (which Terry called the Cash Buildup stage) for equities has ended. It has made me more cautious regarding entering investment funds during the discovered Short Range T’s (although it does allow me to trade them). I’ve created my additional tools over the last 11 years, and in periods such as now they become important adjuncts to the Volume Oscillator. In order to find periods where the Volume Oscillator T’s give a higher percentage of Positive Outcomes, I’ve started to look more closely at the Advance/Decline chart for those longer T’s, and for what I would consider an end to the Cash Buildup period.

In February I pointed out that the A/D Weekly line had started to move lower, but in general it has shown resilience since the October 2022 low by crossing back above both the 20 and 50 EMA’s. Last week I pointed out that there’s a possibility that the low in both the A/D line and Price in October may constitute the end of the Cash Buildup period, leading to a T that will end sometime in July.

I expected an investible short-term bottom to appear in mid-March, and it did, sending the A/D line to its present position, which once more has reached the point where it has failed 4 times over the last 16 months–roughly 7600. The A/D line did not allow me to invest, but rather trade with this T in mind.

Price is now approaching the February peak. A caveat is that MACD shows a slowing of momentum, with a negative cross of the fast to the slow EMA. The A/D itself is approaching those “magic” Keltner peak level as it approaches resistance which has failed 4 times recently. So while my last 2 posts called for a change of trend–to neutral, followed by suggesting that “we need a breakout soon“, we do not have a confirmation of that breakout yet. Should it occur, I will have to adjust my conservative approach. But for right now, we’re in the neutral zone.

MACD can show us how the market is neutral right now regarding future direction. I think this chart speaks clearly about the difference between what momentum looks like in different MACD regimes:

MACD shows us both trend and momentum. The above chart has examples of all three possible trends. We haven’t yet concluded the blue, neutral trend. Right now MACD is near the center line, and while it had begun to turn down, the last 2 days have made a positive crossover possible. This will give us 2 indications of future direction (but hasn’t done so yet). For one, a MACD centerline crossover on its own portends future direction–a move below the centerline is a bearish move, while a move above it is bullish. Secondly, a crossover of the shorter EMA above the longer EMA will give us a bullish or bearish signal as well in terms of future price direction. We are at a point where both or none should occur this week. It’s very important to watch this. I have added it to the menu under Additional Charts for Review as MACD Trends.

Long story short, you can’t rely on the same group of indicators in different Price Regimes–they may give you hints, but you must consider additional evidence. Please notice that I don’t mention the fundamental problems we may be facing. It’s my belief that Price is aware of those problems, and has already reacted. They may have incorrectly interpreted the data, but it is definitely affecting Price. So let’s look at some additional tools.

The short one-year view of the BPSPX chart on the website shows that we were moved into a sell on April 21, as the line marked Recent Failure Line held, just at the point where it met the upper Keltner band.

Let’s look at this same chart with a different point of view. By removing the Keltner bands, we can more clearly see that the BPSPX has been showing descending tops with few exceptions over the course of this Cash Buildup phase. Since its last peak prior to the October Price bottom, we have seen fewer stocks showing improvement before the following peak, creating a down trending line as the Bullish Percentage of stocks involved in making the peaks has been trending lower. I will repeat what BPSPX represents–Point and Figure Buys vs sells:

 There is no ambiguity on P&F charts because a stock is either on a P&F Buy Signal or P&F Sell Signal. The Bullish Percent Index fluctuates between 0% and 100%. In its most basic form, the Bullish Percent Index favors the bulls when above 50% and the bears when below 50%. 

StockCharts

Since that October low, the BPSPX has had lower lows as well as lower highs. This is not the sign of a strong market. But as we approach the 50 level, we must respect the neutrality it represents.

Reviewing the Simple Chart, it is turning higher while still in positive momentum territory for both Breadth and Volume.

Turning to the unmarked T-Theory Chart, both the VO and the McOsci find themselves in positive territory. The McOsci has just broken above the zero line. Reviewing Terry’s rules during normal lowering interest times, a bottom has been made. But a new T is confirmed when the peak VO or McOsci move above the descending peak that preceded the Oscillator from moving below the zero line. That won’t occur for the McOsci until it moves above 60, which is still a distance from Friday’s close. Once more I remind that while potentially the market has created an A/D T through July, I won’t confirm it until we have a new high on the A/D line and Price has passed the February peak. And of course, that could still turn into a Bear T through July. I have to say that this is still an option.

Right now, we have a T that has an ending May 1. The market needs to have what I consider a positive ending to that T, because there is also a Price T on the Hourly chart that extends through May 8. As I quoted Terry above :

In other words, a projected advance in the right side of a Short Range T will not materialize as expected if the key technical and fundamental ingredients are not in place.

The hourly T should be tested early this week, as MFI and RSI have moved into overbought regions. The important number to watch is 4120 support. That is the middle Keltner.

This T was posted in the morning of April 27, after proposing to those on elliottwavetrader.net at the close on the previous day (April 26) that we had come within 3 points of the middle Keltner on the daily chart, which corresponded to the lower Keltner on the hourly chart, offering good support to a long position. For me, being near a key support is extremely important in having a Positive Outcome for my trade or investment. Coming to the top of the Keltner, it is fairly probable that the Frog will jump back down to the middle of the Keltner bands. There is absolutely nothing wrong with the concept of Buy Low and Sell High. I will probably remove my trade early this week.

This may seem to be in conflict with Rule 1 posted above–You can’t have a new T extend further than the end of the last T if it is built inside that first T. But one is a Price T and the other a VO T. I will personally remove myself from the Price T should we break below 4120, or if we go above the hourly Keltners and return within them. (The latter scenario will be more profitable.)

A sustained move that doesn’t above 4200 that doesn’t fail is important to the future of Positive Outcomes.

As mentioned last month, the Short Term Companion Chart had markings for the period between 4-10 and 4-27. That marked the end of a Period of Recognition (I sometimes call this an Inflection Point) which was based on the meeting of two major trend lines–the descending tops starting in January of 2022 was about to merge with the major support line from March of 2020. I find these points create a move of roughly +/- 3% when they occur. The direction is not always clear, and they are more relevant (if less directionally clear) if Price is at that Inflection Point at the time of their merging. But with Price barely holding the support trend line from October as technicals were moving to an overbought position, it was more probable that this was going to be a top.

What actually occurred was a move lower of about 2% to the middle Keltner at 4046 on Wednesday, which was immediately followed by a 120 point (3%) rally over the next 2 days, just as the Price T was discovered. I had suggested here that readers use an option straddle position for these inflection points. In my opinion, buying a short term straddle in a market with low volatility prior to an expected move of 3% is an acceptable risk. It was difficult to watch volatility take a beating as it continued to shrink prior to the large move lower April 25-26, but it was rewarding in the end. The change in SPX closing price from 4-17 through 4-28 was as follows:

Keep your eye on how the end of the present Price and Volume Oscillator T’s end. We are still in this directionless range. But it should be tested soon.

As for the Gold T, it has about another 10 days to go, RSI is right at the neutral (what else) 50 mark. Should it fall below that I would remove longs. The Gold Sentiment chart I post is showing an increase in the discount to premium on NAV on the Sprott funds. This is usually supportive.