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The Market's Second Line Of Defense

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTI, VTWO, VV
by: Chris Ciovacco
Chris Ciovacco
Multiple asset class via ETFs, proprietary market model, rules based system, Long, special situation short
Summary

What happens if the S&P 500 continues to fall?

What levels might attract higher conviction from buyers?

Is this the beginning of the end for the stock market bulls?

Fear Of The Unknown Leads To Mistakes

In competitive athletic competitions, it is likely at some point during the event you are going to face some adversity. Respecting and acknowledging periods of adversity before the game starts allows competitors to mentally prepare for both favorable and unfavorable periods. It is very similar in the markets (VTI).

We have been showing the S&P 500 (SPY) retracement levels below since September 24. If 2688 does not hold, to minimize the odds of an emotional overreaction, it is prudent to understand areas of possible support below 2688.

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The S&P 500 (IVV) made an intraday low of 2532 on February 11, 2018. The market was weak again in early April and early May, but in both cases 2532 was not taken out.

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Since there is a 156 point gap between 2688 and 2532, it would be easy to envision the market dropping like a stone if 2688 is breached, which could lead to high anxiety and higher odds of an emotionally-induced market misstep.

Other Logical Areas Of Possible Support

Given markets are primarily a psychological game, it is important we use reasonable terms to describe a range of future outcomes. For example, if we refer to support as just support, it implies the area will hold. Thus, we always refer to support as “possible support”.

The horizontal lines on the S&P 500 (VOO) chart below represent numerous areas of possible and logical support if the market continues to experience a higher conviction from sellers relative to buyers in the coming weeks.

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In the remainder of this post, we will outline why the levels above are relevant.

March 2017 Low

Fractals tell us the concept of normal retracements of bullish moves applies to all timeframes, from very short to very long. Assume a market participant began accumulating positions near the March 2017 low based on the belief the long-term trends were still constructive. Relative to their entry point, a market retracement based on the A to B levels shown below would not significantly damage their bullish thesis. The levels are 2704, 2631, and 2558.

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U.S. Election Low

The same logic can be applied to an investor who accumulated positions near the November 4, 2016 intraday low (four days before the November 8, 2016 election). The first two retracements are most relevant to the current pullback; they are 2613 and 2512.

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Early Stages Of Secular Trend

The long-term charts we have been covering in CCM’s weekly videos tell us to remain open to the possibility Q1 2016 was a major turning point for stocks and central banks. Since many market participants began accumulating equity investments in 2016, it is logical to understand normal retracement possibilities for the A to B move defined by the February 2016 low and September 2018 high. The 38.2% retracement comes in at 2508, or 24 points below the February 2018 intraday low of 2532.

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The Big Picture

Does the evidence we have in hand lean more toward the continuing bull market theory or the early stages of a new bear market theory? You can draw your own conclusions after reviewing what some viewers have termed this week’s “must watch” video.

Summary

It is prudent to remain open to all outcomes in the financial markets, from wildly bullish to wildly bearish. Under our approach, the data tracked by the model will govern our decisions. The levels below can help us review the incoming data in a cool, calm, and collected manner should the S&P 500 continue to decline over the coming days and weeks.

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Last Major Milestone

Bullish trends make a series of higher highs and higher lows. Bearish trends make a series of lower highs and lower lows. The last major high or major low was a new all-time high in the S&P 500 printed on September 21, 2018. Thus far, we have a higher low relative to the February 2018 low of 2532.

The 200-day moving average in 2018 serves as a proxy for the weight of the evidence on multiple timeframes; it still favors a bullish resolution over the early stages of a new bear market. If the facts deteriorate in a meaningful manner in the coming days and weeks, we must be flexible enough to adjust our assessment of the probabilities; that may happen, but it hasn’t happened yet. Day by day.

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Disclosure: I am/we are long SPY, VOO, IVV, VTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.