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Did An Irresistible Force Meet An Immovable Object?

Summary

  • As we have discussed previously, price movements are very much confined by the "physics" of technicals.
  • We lifted profits at the 200-dma and added hedges to the Equity and Equity Long/Short portfolios.
  • What will be critically important now is for the markets to retest and hold support at the Oct-Nov lows, which will coincide with the 50-dma.
  • A failure of that level will likely see a retest of the 2018 lows.

Since the day after Christmas, the markets have been in a surge very similar to what we saw in January of 2018.

Here is January 2018:

And 2019:

Of course, in February 2018, the rally ended.

While I am not suggesting that the markets are about to suffer a 10% correction, what I am suggesting, as I wrote this past week, is that the markets have been "Too Fast & Too Furious."

"Short-term technical indicators also show the violent reversion from extreme oversold conditions back to extreme overbought."

As we have discussed previously, price movements are very much confined by the "physics" of technicals. A couple of weeks ago, we drew out what we expected to be the movement over the market over the next couple of weeks.

We said then the most likely target for the rally was the 200-dma. It was essentially the level at which the "irresistible force would meet the immovable object."

The chart below is updated through Friday afternoon:

As noted, we lifted profits at the 200-dma and added hedges to the Equity and Equity Long/Short portfolios.

What will be critically important now is for the markets to retest and hold support at the Oct-Nov lows which will coincide with the 50-dma. A failure of that level will likely see a retest of the 2018 lows.

A retest of those lows by the way is not an "outside chance." It is actually a fairly high possibility. A look back at the 2015-2016 correction makes the case for that fairly clearly.

But even if a retest of lows doesn't happen, you should be aware that sharp market rallies are not uncommon, but almost always have a subsequent retracement.

The point here is that the move off of the December lows is likely now complete, for now.

This article was written by

Lance Roberts profile picture
30.07K Followers
Unique, unbiased and contrarian real investment advice

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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