Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Why You Shouldn’t Get Excited About Gold Price Mini-Rally - 26th Jan 21
The Truth About Personal Savings Everybody Should Know and Think About - 26th Jan 21
4 Economic Challenges for 2021 - 26th Jan 21
Scan Computers 2021 "Awaiting Picking" - 5950x RTX 3080 Custom PC Build Stock Status - 26th Jan 21
The End of the World History Stock Market Chart : Big Pattern = Big Move - 26th Jan 21
Stock Market Recent Sector Triggers Suggest Stocks May Enter Rally Phase - 26th Jan 21
3 Top-Performing Tech Stocks for 2021 - 26th Jan 21
5 Tips to Manage Your Debt - 26th Jan 21
Stock Market Intermediate Trend Intact - 25th Jan 21
Precious Metals Could Decline Before their Next Attempt to Rally - 25th Jan 21
Great Ways of Choosing Good CMMS Software for a Business - 25th Jan 21
The Dark Forces behind American Insurrectionists - 25th Jan 21
Economic Stimulus Doesn’t Always Stimulate – Pushing On A String - 25th Jan 21
Can Karcher K7 Pressure Washer Clean a Weed Infested Driveway? Extreme Power Test - 25th Jan 21
Lockdown Sea Shanty Craze - "Drunken Sailor" on the Pirate Falls Crazy Boat Ride - 25th Jan 21
Intel Empire Fights Back with Rocket and Alder Lake! - 24th Jan 21
4 Reasons for Coronavirus 2021 Hope - 24th Jan 21
Apple M1 Chip Another Nail in Intel's Coffin - Top AI Tech Stocks 2021 - 24th Jan 21
Stock Market: Why You Should Prepare for a Jump in Volatility - 24th Jan 21
What’s next for Bitcoin Price – $56k or $16k? - 24th Jan 21
How Does Credit Repair Work? - 24th Jan 21
Silver Price 2021 Roadmap - 22nd Jan 21
Why Biden Wants to Win the Fight for $15 Federal Minimum Wage - 22nd Jan 21
Here’s Why Gold Recently Moved Up - 22nd Jan 21
US Dollar Decline creates New Sector Opportunities to Trade - 22nd Jan 21
Sandisk Extreme Micro SDXC Memory Card Read Write Speed Test Actual vs Sales Pitch - 22nd Jan 21
NHS Recommends Oximeter Oxygen Sensor Monitors for Everyone 10 Months Late! - 22nd Jan 21
DoorDash Has All the Makings of the “Next Amazon” - 22nd Jan 21
How to Survive a Silver-Gold Sucker Punch - 22nd Jan 21
2021: The Year of the Gripping Hand - 22nd Jan 21
Technology Minerals appoints ex-BP Petrochemicals CEO as Advisor - 22nd Jan 21
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Is the Stock Market Ever Going to Pullback?

Stock-Markets / Stock Markets 2019 Feb 03, 2019 - 01:27 PM GMT

By: Troy_Bombardia

Stock-Markets

By now everyone is aware that these “crash & rally” patterns are usually followed by a pullback or retest. Most of these pullbacks/retests occur once the S&P has reached its 50% retracement. But with the S&P now having retraced 60% of its Q4 2018 decline, many traders are doubting whether or not the S&P will pullback/retest at all, or if it’s going straight to new all time highs.


Go here to understand our fundamentals-driven long term outlook.

Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.

Reviewing the charts

Yes, it’s true that most of these 15-20% declines are followed by a pullback/retest at the 50% retracement level.

HOWEVER, not all of them do.

  1. A few are followed by a pullback/retest after the S&P has rallied even more
  2. A few are followed by a pullback/retest after the S&P rallied less

Here are the historical cases.

The stock market crashed and retraced 48% before retesting in 2011. The S&P was under its 200 dma

The stock market crashed and retraced 57% before falling even more in 2008. The S&P was at its 200 dma

The stock market crashed and retraced 49% before falling even more in 2001. The S&P was at its 200 dma

The stock market crashed and retraced 50% before retesting in 1998. The S&P was at its 200 dma

The stock market crashed and retraced 52% before making a pullback in 1990. The S&P was at its 200 dma

The stock market crashed and retraced 35.2% before retesting in 1987. The S&P was far under its 200 dma

*This case doesn’t really apply to today. The retracement was very shallow (35.2%) because the crash was so massive in 1987. So naturally the retracement would be shallow in terms of fibonacci retracements, even though the S&P had rallied a lot in just 2 days

The stock market crashed and retraced 53% before falling to new lows in 1982. The S&P was at its 200 dma

The S&P crashed and rallied straight to new all-time highs

The stock market crashed and retraced 59% before falling to new lows in 1973. The S&P was above its 200 dma

The stock market crashed and retraced 50% before falling to new lows in 1969. The S&P was at its 200 dma

The stock market crashed and retraced 33% before retesting in 1967. The S&P was far under its 200 dma

*This case doesn’t really apply to today. The retracement was very shallow (33%) because the crash was massive in 1966. So naturally the retracement would be shallow in terms of fibonacci retracements, even though the S&P had rallied a lot in absolute % terms

The stock market crashed and retraced 42% before retesting in 1962. The S&P was far under its 200 dma

The stock market crashed, rallied to almost a new high, crashed even more, and then rallied straight to new all-time highs.

The stock market crashed and retraced 60% before falling to new lows in 1937. The S&P was at its 200 dma

The stock market crashed and retraced 50% before falling to new lows in 1930.

*This case doesn’t apply to today, as the preceding crash in 1929 was massive compared to the stock market’s crash in Q4 2018

Conclusion:

  1. Most of these “crash and rally” patterns stall at the 50% retracement level or 200 day moving average
  2. It is not impossible for the S&P to retrace 60% before making a pullback/retest. This happened in 1937 and 1973
  3. It is not impossible for the S&P to rally straight to new all-time highs. This happened in 1980. (The context back then was very different from today. The 1980 case occurred after an economic recession. Post-recession rallies are always extremely fierce, and often don’t have any pullback/retest. There is no recession today, so the context is different)
  4. It is not impossible for the S&P to rally to almost a new all-time high before making a pullback/retest. This happened in 1957, and to a lesser extent 2015-2016

So what is the point?

“Crash, rally, pullback/retest” patterns come in all shapes and sizes.

Most of the pullback/retests happen at the 50% retracement level, a few of them occur only when the S&P is near all-time highs. Only 1 of them never saw a pullback/retest, and that case (1980) was very different from today.

Biggest problem

We’ve already looked at chart patterns. The problem with chart patterns is that they can “look” bullish or bearish, depending on what the viewer already believes. The human eye is conditioned to see what it wants to see when staring at a chart. That is why we use trading models. Objective > subjective

The biggest problem right now for the stock market isn’t the “crash, rally, retest” pattern.

The biggest problem is:

The longer the stock market remains in a downtrend while macro doesn’t improve, the more trouble long term bulls are in.

The Unemployment Rate is very low, but is starting to tick up. This may be temporarily due to the government shutdown. But if it persists for a few more months, long term bulls really need to watch out.

Meanwhile, the S&P remains below its 1 year moving average.

The last time this happened was at the start of the 2007-2009 bear market. But of course, “the last time this happened was 2008” doesn’t mean anything. We need to look at ALL the historical cases to draw a more accurate conclusion, instead of only looking at the bearish cases.

Here’s every single time the S&P was below its 12 month moving average for 2 consecutive months, while the Unemployment Rate was above its 12 month moving average for 2 consecutive months.

*Data from 1950-present

As you can see, this almost exclusively happened within the context of a bear market or recession.

VIX

Our market studies in December 2018 were consistently bullish. But now that the stock market has rallied significantly, our market studies are mixed. Few of them are as bullish as they used to be.

While the stock market rallied, VIX has finally closed below its 200 day moving average for the first time since early-October 2018, when the stock market crash began.

Here’s what happens next to the S&P when VIX closes below its 200 dma for the first time in 3 months.

*Data from 1990-present

As you can see, the stock market’s forward returns are mostly random.

But what about VIX itself?

As you can see, VIX tends to rise 2 weeks later and 3-6 months later.

Macro Context

This content is for members only.

Strong rally

The stock market’s recent rally has been very strong and incessant.

It has gone up 5 of the past 6 weeks, while still under its 40 weekly moving average (i.e. 200 day moving average).

Here’s what happens next to the S&P when it goes up at least 5 of the past 6 weeks, gained more than 10%, and is still under its 40 weekly moving average

*Data from 1950-present

Once again, you can see that most of the “crash & rally” cases are followed by a pullback/retest

The only historical case that went straight up was 2009, after the S&P crashed more than 50%.

 

Quite the reversal

And lastly, this has been quite the 2 month reversal. The S&P fell more than -9% in December and then gained more than +7% in January

This kind of 2 month reversal has only happened 3 other times since 1950

All 3 of these historical cases happened at the end of massive 50%+ bear markets.

The context is clearly from today. In each of these historical cases, the S&P fell more than -50%. In Q4 2018, the S&P fell less than -20%

Let’s expand the sample size to data from 1900-present

Here, you can see that the long term returns are less positive. This happens at the end of bear markets and in the middle of bear markets too.

Click here for yesterday’s market study

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 3-6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retest. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook is not 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