Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Stalls: Caution Ahead - 21st Oct 19
Stock Market Crash Setup? - 21st Oct 19
More Stock Market Congestion (Distribution) - 21st Oct 19
Revisiting “Black Monday Stock Market Crash October 19 1987 - 21st Oct 19
Land Rover Discovery Sports Out of Warranty Top Money Saving Tips - 21st Oct 19
Investing lessons from the 1987 Stock Market Crash From Who Beat it - 20th Oct 19
Trade Wars: Facts And Fallacies - 20th Oct 19
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Stock Market Sharp Corrections and Bounces are Usually Followed by Retests

Stock-Markets / Stock Markets 2018 Nov 05, 2018 - 01:26 PM GMT

By: Troy_Bombardia

Stock-Markets

After a rapid drop last month, the U.S. stock market has bounced over the past 3 days. The S&P’s most likely target for this bounce is its 200 day moving average.


Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For the sake of reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty.

Very strong bounces usually see a retest before trending higher

Very strong post-correction rallies usually see a 50-61.8% retracement bounce, a retest, and then an uptrend. This is how the January 2018 correction played out.

That is the most probable case for this correction as well.

For starters, the S&P 500 has rallied more than 1% for 3 days in a row after falling to a 5 month low.

Here’s what happened next to the S&P 500 when it rallied more than 1% for 3 days in a row after falling to a 5 month low.

As you can see, the S&P tends to fall in the next 2 weeks. However, many of these historical cases occurred in 1932 – 1933, AFTER the stock market had already crashed 50%+ and the economy was in a depression. So this doesn’t account for context.

Here’s what the same chart looks like if we only look at the cases after 1950:

The sample size is smaller, but overall, the U.S. stock market tends to rally over the next 3 months, even if it does face short term weakness.

Another way of looking at this sharp rally

Here’s another way of looking at this sharp bounce.

The S&P 500’s 1 month rate-of-change is less than -6%, while it’s 3 day rate-of-change is more than +3%.

Such a sharp drop and sharp bounce is rare when the S&P is less than -10% below its 1 year high.

Here are the historical cases from 1927 present.

Let’s expand the sample sizes.

Here’s what happened next to the S&P 500 when its 1 month rate-of-change was less than -5%, its 3 day rate-of-change was more than +3%, while it was within -10% of a 1 year high.

As you can see, the S&P tends to face short term weakness over the next 1 week, while it tends to go up 3 months later.

Let’s expand the sample sizes even more.

Here’s what happened next to the S&P 500 when its 1 month rate-of-change was less than -5%, its 3 day rate-of-change was more than +3%, while it was within -20% of a 1 year high.

Once again, the S&P tends to fall over the next 1 week.

All the buying has occurred during the night

Here’s a very interesting observation.

This chart demonstrates what happens in 2018 if you:

  1. Buy and hold only during regular trading hours (i.e. buy at 9:30 am and sell at 4 pm each day), vs….
  2. Buy and hold only during after-hours trading (i.e. buy at 4 pm and sell the next day at 9:30 am).

As you can see, almost all of the S&P 500’s gains this year have come from after-hours trading.

From 1962 – present, this kind of divergence is unprecedented. There has never been another historical case in which over the past 11 months, the S&P during the day has gone down more than -10% while the S&P at night has gone up more than +10%.

The closest such divergence occurred on January 12, 1972, when the S&P during the night had gone up +3% while the S&P during the day had gone down -3% over the past 11 months. As you know, the U.S. stock market began a bear market 1 year later in January 1973

As I said, this kind of divergence is unheard of.

Some traders see this as a bearish sign, i.e. “some is ramping up” the market on after-hours low volume while the majority sell their stocks during regular hours trading.

I don’t think it’s that simple. No single force is big enough to manipulate the market that way. Most claims of “manipulation” end up being nothing more than conspiracy theories.

Anyways, just some food for thought. I don’t think this is bearish or bullish. These days overnight trading is more important than ever. That’s why big “gap ups” and “gap downs” are increasingly common. Globalisation has resulted in trillions of dollars of non-U.S. money flooding into U.S. markets.

A completely irrelevant factor

In the next few weeks the S&P 500 will most likely make a “death cross”, whereby its 50 daily moving average crosses below its 200 daily moving average.

When that happens, you can be sure that mainstream financial media will trip over themselves screaming “HOLY SHIT THE STOCK MARKET MADE A DEATH CROSS. THE WORLD IS ENDING!!!!!”

But factually speaking, “death crosses” are no better than a coin toss at predicting the market. Every single bear market had a death cross, but most death crosses don’t result in bear markets.

The S&P 500 has made a smaller “death cross” recently. It’s 20 day moving average has fallen below its 200 day moving average.

This kind of “death cross” is neither consistently bullish nor bearish for the U.S. stock market on any time frame. It is no better than a coin toss.

Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019.
  2. The medium term remains bullish (i.e. trend for the next 6-9 months). Volatility is extremely high right now. Since volatility is mean-reverting and moves in the opposite direction of the stock market, this is medium term bullish.
  3. The short term is slightly bearish. There’s a slightly >50% chance that the S&P will retest its lows from last week. This probability isn’t exceptionally high, so I wouldn’t bank on it.
  4. When the stock market’s short term is unclear (as it is most of the time), focus on the medium term. Step back and look at the big picture. Don’t lose yourself in a sea of noise.

Our discretionary outlook is usually, but not always, a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules