I dont believe in Santa, but there may be an Elf rally coming soon 

It’s too late for any hope of the Santa Rally for the S&P 500 or the TSX 300. In fact, we now have a “bear market/ phase 2 top” confirmation signal.

For those unfamiliar with my rules– to confirm an uptrend (mid termed trend) on the weekly chart we need:

  • Higher highs
  • Higher lows
  • Market above the 200 day (40 week) simple moving average (SMA)

Its ok if one of the conditions are broken to maintain a trend —for example, we often see spikes below the 200 day SMA during bull trends. So long as we an eventual higher high, and the last dominant low is not taken out, we are still on trend.

A break of trend into a sideways market can be signalled by one or two of the above tests failing. For example, in the recent sideways period between January and December, we had a new high (end of September), but we also had a break in the 200 day SMA. The lows had not been taken out, but they were not getting any higher. You can see this on the chart below.

A new bear market is signalled by all three conditions of the bull trend failing. This entails:

  • Lower high
  • Lower low (lasting 3 days)—this is the most important condition
  • Break of the 200 day SMA

In October, the S&P 500 broke its 200 day SMA. It flirted with that average, but didn’t materially move above it since the break. After the break in the 200 day SMA, the market found support in the low 2600’s. You can see this on the chart. At that juncture, the S&P was not yet in a bear market. It was in a sideways market. In fact, the last dominant low was in February around the low 2500’s. So long as that level held, we could consider the market in a consolidation pattern.

Along came last week. The final condition of verifying that the sideways market had turned into a phase 2 “top” looked to be in place. We saw a break of that vital February low of approximately 2540.  The break occurred on Thursday December 20th. I always count 3 days to confirm a break. Today (Monday December 24th) is d-day. Assuming no miracle, the market will likely remain below 2540. Thus, we can call it a bear market after today’s close.

 

What is the strategy?

In the likely scenario of a bear market, we need to sell the rallies. As noted on my Friday Bloomberg BNN appearance the markets are massively oversold. I’d be shocked if we did not see a brief rally in the coming days or weeks. That rally should be sold if it doesn’t break back above 2540. I think it will fail at or near that level. I’m going to take what I can and see if I can play the swings if the conditions for a new bear trend continue.

This market is now a traders market. Go in and out. That’s what we will be doing. Buy and hold will not work until we return to a bull trend, as indicated by the 3 factors noted at the top of this blog (higher highs, higher lows, above 200 day SMA). Read this blog for more thoughts on what type of analysis works best in a volatile market.

I will attempt to post another blog on Thursday of this week. On that blog I will address the conditions and revisit my neartermed outlook and strategy.

 

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. I will provide one other warning on Thursday. 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 prefer 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. I only do this once a year, and now you have been warned. I’ll warn you again this Thursday, then its your choice if you wish to read the rant next Monday.

 

 

Merry Christmas to you all and your families!

22 Comments

  • I thought S&P close below 2540 on Wednesday. So shouldn’t today 12/24 be day 4?

    Reply
    • i tend to do D-day +3.
      The next step is to look for the oversold rally–then sell into it. Very, very likely to occur soon.

      Reply
  • If you look at the monthly chart the S&p as well as the Russell 2000 and dj transport has pulled back to the long term trend line that started in 2009. Good chance it at least pauses here. If it slices right through that trend line wow next stop could be 2000 on the S&P

    Reply
  • Thanks for the updates Keith, always enjoy reading your work…
    I have been keeping an eye on gold which has now been above 1240 for about a week now – are you looking at gold as a buy at this time?
    Wishing a very Merry Christmas to you and your family!

    Reply
    • Gold certainly looks positve right now–it might target the mid 1300’s as a first point of interest….

      Reply
  • Hello Keith,
    Wow, this is very painful period,
    I will read and to learn your opinion on 31/Dec/2018,
    Hope you may give us for your insight for 2018 to reduce most position or keep remain.
    Thanks a lot,
    Merry Christmas and Happy New year!
    Ricky

    Reply
  • Merry Christmas Keith & to all the blog followers,
    Looking at yesterday’s trading, it is obvious the selling is far from over. The fact that this bull market ran fast and hard for 9 plus years, it has plenty more to fall. I do not think this is your garden variety 20% correction. This is a full-fledge bear market, which will have it’s rallies as you mentioned. Rallies that we can use to get out of our positions as you mentioned on BNN. Unfortunately, the “sell the rallies” is being mentioned everywhere which has me concerned. If everyone ‘thinking’ and doing the same, this will lead to more violent and deeper sell-offs. My take is the Nasdaq will continue driving all the indexes down. Amazon will fall to 400 bringing al the FANG stocks down with it, thus creating this selling pressure on every index. ETF’s will accelerate the selling, as these have not been tested in a full fledged bear market. The algorithmic trading machines are IMO creating havoc and should be banned. These algorithmic machines may just crash the market, as they trade in nano-seconds (like the sell-off we had at 2:00 p.m when Powell announced 2 more rate hikes last Wednesday, the algorithmic machines went ballistic dropping the market down 600 points in a matter of minutes. This carnage the FANG stocks will cause will be legendary. Ironically this sell-off has nothing to do with China/U.S trade war or interest rates, or the border Wall. There is something deeper and bigger that the smart money has not come out and stated. In time we will know why the real reason.
    Merry Christmas

    Reply
    • Thanks Ray–see today’s blog (Dec 27th)–you will see that I agree with your bear market outlook

      Reply
    • Yeah, enjoyed writing it, although I may have to start wearing a bullet-proof vest after people who love the current regime read it…

      Reply
  • Hello Keith,
    Merry Christmas and Happy New Year!
    Wow , Today is really good day for stock,
    please kindly give your insight and
    what do you think to go further,
    May this for bear market bounce or time can keep it ,
    Thank you very much,
    Ricky

    Reply
  • Merry Christmas & Happy New Year to Keith & all involved with this blog.
    Keith, I try & read all your blogs ( usually late) & can say that your predictions were on target. From the blog I understand that if S&P does not break 2540 for 3 days then you will sell. Does your analysis show that it will /will not break that level. Thanks

    Reply
  • Good Morning Keith,

    If there is a upward rally will you sell off positions that you have in your income portfolio or platform as you say?

    Thank you

    Paul

    Reply
    • Paul, obviously we are more active in our equity platform, but there are a few positions in the equity platform we are looking at selling due to technical breakdowns. We are much more forgiving and long termed in nature when it comes to dividend income stocks – but a few of them are materially breaking down

      Reply

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