Friday, August 21, 2015
bear market ?
You can see that all three are now trading below their 200 day moving averages. This is a long term sell signal according to my two out of three rule. Moreover, you can see that the cash S&P has staged a downside breakout from its long, February-August trading range and this has occurred on very high volume. This reinforces the long term bearish case.
The top chart shows the Dow labeled with point 23, the top of Lindsay's domed house. I don't think there can be much doubt about what is happening here. The entire three peaks and a domed house formation now calls for a drop in the Dow below its October 2014 low (solid blue line at bottom of chart).
Looking ahead I think these past two days of heavy selling will lead to a snap-back rally. But I don't think that the rally will carry the averages past the midpoints of the drop (dashed red lines). Both of these midpoint also sit right near the current position of the 200 day moving average which is normally resistance in a bear market.
My downside target is roughly the level of the October 2014 low (blue lines in the Dow and S&P). This would amount to about a 15% drop, not quite as big in percentage terms as the 2011 decline. I think the Fed will probably respond to a drooping stock market by holding off on interest rate increases and, if things look bad enough, will probably resume its QE program in some form. Such monetary actions will limit the damage to asset prices and limit the stock market decline to something less than a full blown (20% +) bear market. World wide liquidity is still being increased by the ECB, the Bank of Japan, and the Peoples Bank of China. I think this too will serve to limit the downside potential of this drop.