Bear market confirmation

December 27, 201829 Comments

As noted on this blog the market is ripe for a near termed rally. Yesterdays Boxing Day blip pushed the Dow up 1000 points. But I note on today’s futures that the market looks to open lower – this, after the largest boxing day rally on record. As I projected on my Friday Bloomberg BNN appearance I feel the S&P will get into its former support zone in the low-mid 2500’s on the current rally. The chart below shows us just how oversold markets have been (short termed timing model).

If the market can break above 2540, it will be back into a consolidation pattern, which had been in place since January 2018. However, I believe the odds are slim for a return to a sideways contained market. I am convinced we have entered into a bear market.

 

Why I think there is a good potential that we may have entered into a bear market

As noted on prior blogs, I have felt that there was at least some potential for the market’s low volatility/ parabolic movement in 2017 to be a “5th wave”. The term 5th wave comes from the Elliott Wave Theory of a 5-wave major trend. Each wave has a characteristic, the 5th being the last of those market stages. 5th waves are characterized by speculation, low volatility, concentration in leadership, irrational behaviour of investors and a parabolic move off of the longer trend line. 2017 did seem to illustrate all of those conditions – given the concentration and enthusiasm surrounding FANG and related stocks. In fact, I suggested on a blog in late October of 2017 that we may have been in the 5th wave of the market cycle. I strongly recommend you visit that blog to get a basic understanding of how the EWT waves work.

Armchair Elliott Wave: The macro postion of the market | ValueTrend

 

Classic technical bear market signals

Beyond the potential of 2017 having been the final bull market phase within EWT observations, last weeks break of the 2540 lows set earlier this year suggested that we are indeed skewed towards the probability of a new bear market. Again–please refer to my last blog to see the chart indications for that observation. A topping formation that breaks its neckline with an aggressive waterfall movement down will typically see a revisit of that neckline via an oversold bounce. Yesterdays move was likely the beginning of an oversold bounce. It is my intention to sell stocks and raise cash at or near the low 2500’s on the S&P 500.

One factor that may make my bearish outlook wrong could be some research by sentimentrader.com. Jason Goepfert shows that there have been six declines of 17% or more off of a 52 week high since 1980. This type of rapid decline moved to positive returns on almost all timeframes (1 month right up to 1 year) in all six cases. That’s a statistic, and you know what they say about statistics ( i.e. you can find a statistic to prove anything)….but it’s worth taking into account.

 

Warning

I will post my annual rant-blog on Monday December 31st. Each year I rant on a different subject. This years rant will be a polarized political piece. The rant-blog will not focus on technical analysis. It may frustrate those who don’t want to read a political piece on a technical analysis blog. Some readers may want to avoid reading my opinions on the subject of politics. As such, I would encourage those who would like to avoid a political opinion piece and would prefer to focus on my technical market analysis blogs to skip next Monday’s blog.  Those individuals are welcome to revisit the blog when I post again mid-week. I only do a rant once a year, and now you have been warned that this year’s will be politically charged. I’ll be back to the technical stuff by Wednesday or Thursday of next week, and its your choice if you wish to read the rant next Monday.

29 Comments

  • looking forward too your rant i sense from your small rant on bnn that we are on the same page

    Reply
  • Even with that rally yesterday it does seem that there’s an underlying weakness remaining to the markets

    Reply
  • Hi Keith:

    So you may sell into a rally nearing resistance unless Jason’s research plays out as historically it has. Do you maintain a higher level of cash as well as trading or do you try to maintain a high level of investment? Happy new year.

    Reply
    • We have about 13% cash right now. We had 23% cash into the mid termed election and bought on that low point–hoping to see a lasting rebound on the mid-termed rally that often occurs. So, while I am glad to have cash, wish we had more. All in though, we have done a lot better than the market this year.

      Reply
  • So, the indicators point to a Bear Market confirmation for the S&P. Can we say the same for the TSX, re: 5th Wave, TSX support/resistance levels, and other indicators? Also, how will the S&P trend affect the TSX? Will we see the fund flow from the S&P to a better valued TSX? 🙂

    All the best of technical trends to you and everyone for 2019!

    John

    Reply
    • John there is some potential for a tsx outperformance this coming year if the commodities outperform. Yes, it may see fun flow if that is the case.
      But re 5th wave for the TSX–it didn’t go through the same classic pattern as did the S&P 500. Basically, the TSX made a high of 15,000 in 2008, it struggled to hit a bit over 16,000 this fall (a whopping 6% gain in price in a decade) and its now around 14,000. There was no final speculative bubble or anything like that, as one could potentially suggest happened last year on the US markets. It has been a dead fish in the water for a long time.

      Reply
  • Some weakness but I doubt the spx 2346 low will be taken out. I think we have stabilized for now. Pessimism I think peaked just before Xmas. And the cart from 2009 illustrates this is the 3rd decent pullback of a trendline that isn’t parabolic. If 2346 is taken out of course that calls for a more bearish move but I don’t think it will happen.

    Reply
    • There is a good chance that, rather than a bear, we go into a choppy period with a new lid at old resistance (low 2500’s).
      Whether its a bear or a contained market, Technical analysis is going to rule the roost for a while, methinks.

      Reply
  • Great reading material, I am watching for the s^p 500 to get to around the 2550 level and continue to rise for an additional three days.
    At which time I plan to deploy more funds into the market.
    What happens if the s^p only recovers for only two days.? – Do you still start deploying capital or it has to be three days back to back above the 200-day moving average.
    Currently, have 25% cash weighting.
    Thanks,

    Reply
    • I use 3 days, although it does sometimes cost me upside or downside in a fast market. Still, it has totally saved my bacon by not buying thorough the many head-fake rallies of the past 2 months. So its a good, safe rule – at least it has worked ok for me most of the time.

      Reply
  • great reading – very interesting and informative.

    I agree, let’s see if the s&p can get to 2540 and proceed with at least 3 positive days.
    And then we would be sort of clear to get back in and spend some cash.

    Would you agree.?

    Reply
  • Hi Kieth,
    I am a farmer from Alberta that used to hedge on the Futures market for business purposes.
    I’ve quit using them for this and only use them for speculation now.
    Lately I’ve been shorting the stock indexes which should be a money maker but the extreme volatility is killing me.
    I caught you on BNN last Friday and really liked your 3 day rule.
    I will be looking forward to your political rant as I believe politics is becoming the #1 factor to watch. A long time ago and what seems like in a land far far away, fundamentals used to mean something, then technical analysis and for the last decade it seemed to all be about the Central Banks. Now heaven help us, I think politics are our guiding light. With politicians putting out positive news on trade talks with China,do you think this current rally right at year end may go higher than 2440 on the S&P and be nothing more than window dressing to make certain politicians look better?
    Bob

    Reply
    • Hi Bob
      Being from out west, I am sure you will appreciate my political blog.
      For the record–my outlook is for a return of the S&P 500 to 2540, not 2440. Also, if it can go above that level for (you guessed it…) 3+ days, we may be into the sideways market again….but my guess is it wont. We shall see.
      Finally–interesting you say politics is influencing markets more than ever. I agree. For that reason, I subscribe to Larry McDonalds ACG Analytics. It is institutional research, not retail (very expensive) but he is an expert in interpreting political events and the likely impact on markets. So, you can be assured that my own work takes some of ACG’s political work into consideration.

      Reply
  • I’m looking to hang on to the stocks I have for the longer term as I am already underwater 50% on many (these are Canadian energy stocks). I feel they have been brutalized already so badly that a bottom must be upon us at some point, and the moment I sell they will start skyrocketing up! Although I see that no matter what kind of stock it follows the trend of the overall market in general. What is a typical decline % of stocks once it officially hits this ‘bear market’. Thanks! And yes… I’ve heard you say..” higher highs and lower lows’ .. guess I should have listened to your advice earlier! Haha Thanks

    Reply
  • Many fundamentalists say that this sell off is not reflective of reality. It should be noted that this occurred at a big options expiration date. A past comment of yours may be a reason for the sell off “Everyone watches technical these days”. Some have speculated that the reason for the sell off is trade concerns and once these are alleviated people will buy back in. In past market tops the vix has been 20+. I am a bit surprised that the vix is only what it is. Is what transpired reflective of market tops? Gold as I recall seems to outperform at market tops. The rest of the world is not doing real well. Could we see a bounce back as a flight to safe haven?

    Reply
    • As a technical guy–I would say that whatever is happening IS the current reality!
      But that reality can change…
      And yes, trade talk alleviation could result in a change of trend to the upside.
      The great thing about TA, Bert, is that you can go with the flow. For now, the market is leaning towards bearish. If it stays above 2540 for 3+ days it might mean that bearish bias goes back to a rang-bound bias.
      You can change your mind on how you play this depending on how things change!

      Reply
  • Volumes count and theChristmas week has low volumes. And this year appears to be no different. I’m curious if your 3 day rules applies when it seems mostly it’s the “dumb money” trading.

    Reply
    • Fred – good question–just looked at the sentimentrader compilation
      In a nutshell, it looks like both groups are buying in the past few days, meaning both smart and dumb money

      Reply
  • Thanks for the great technical analysis.

    If S&P goes above 2540 and continue to go up 2 to 3 point each day for 3 days would you put new money or does it have to go up a certain percentage each day?

    Thanks a lot

    Reply
    • Possibly–I will look to see if the markets get overbought from my short termed timing model before buying. I will likely post something on this blog to reflect my thoughts as-if-when that happens

      Reply
  • After 2008 I.m thinking governments worldwide have decided to print as much money as necessary to keep the wheels from falling off the cart. So don’t worry, be happy!! The plunge protection team has our backs!

    Reply
  • Keith could you comment on explanation from a BNN TA guest (Cannacord) who suggests the recent correction and volatility is a result of a ‘4 year cycle reset’. This reset is catagorized by a pullback ot 15% and/or time damage of 34 weeks. His downside target is 2350, which was met, and the prediction is now for a 2-3 yr cycle of busines expansion and the market going up. 4 Year cycle resets occurred in 2011 and 2016, as well as late 2018. Thanks

    Reply
    • Lana–great question. I wont argue with the analysis from Canaccord–mainly because I am unfamiliar with the analysis. But, given my comment to Steve–I believe that we Technical people are always in the best seat for this type of market. We can go with the flow. All else is conjecture, projection and guessing.

      Reply
  • Keith, just started visiting your blog. Very interesting reading. Wondering if you do year end projections for the markets?

    Reply
    • Steve–the great thing about Technical analysis is that we have the ability to go with the flow, rather than make predictions. Thematic projections etc are not part of my world. So I call it as it happens. This blog gives a short take on my current view, and given an upside break as described I can then change gears from bearish to sideways – markets tell me what is happening and how to trade. No sense predicting a year from now.

      Reply

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