Momentum Paints A Clear Picture For Stocks

By Chris Ciovacco

BULL MARKETS BEND BUT DON’T BREAK

Bull markets are ultimately about the ability to sustain long-term momentum during inevitable corrections and pullbacks.  Stockcharts.com describes MACD as “one of the simplest and most effective momentum indicators available”.  Monthly MACD helps us monitor long-term bullish momentum.  In the 2007-2008 case, after the market’s bullish momentum had been bending for some time, it eventually broke after the S&P 500 peaked in October 2007.  Notice how price made a series of lower monthly lows and MACD experienced a bearish cross (red arrow below).  The chart below is what the early stages of a bear market looks like; the S&P 500 did not find a bottom until March 2009.

short-takes-chris-ciovacco-spx-2008-macd.png

1995-1996 CASE

The bend but don’t break concept applied to the pullback and consolidation that occurred in 1996 following a strong rally in 1995.   The monthly chart stayed inside the orange box for seven months (consolidation) and eventually made a new monthly closing high.  Notice how monthly MACD stumbled a bit, but never experienced a bearish cross (green arrow below).  The 1996 case was cited in March of this year in an effort to make the try to be patient case.

short-takes-chris-ciovacco-spx-1996-macd.png

2017-2018 CASE

Sometimes in football, defenses can give up a lot of yards, but when push comes to shove, they limit their opponent’s ability to score.  Bull markets experience scary breakdowns from time to time, but when push comes to shove, the market rights itself and eventually goes on to print new highs.  Given the look of the 2017-2018 chart below, it is fair to say the present day looks a lot more like the 1995-1996 case relative to the 2007-2008 case.  If the market can finish August in a respectable manner (TBD), the S&P 500 would print a new all-time monthly closing high; something that does not align with the major top theory of markets.

short-takes-chris-ciovacco-spx-2018-macd.png

IS IT REALLY DIFFERENT THIS TIME?

You may have reviewed the charts above and thought that’s great, but 2018 looks more like the major stock market peak that was made in the year 2000.  The 2018 vs. 2000 case is covered extensively in this week’s video.  When viewed in the context of history (1935-2018), there is a valuable message hidden in present-day valuations, technicals, demographics, and asset class behavior.  The video reviews facts; you can draw your own conclusions.

MACD IS NOT MAGICAL

MACD is used in this post as a proxy for the weight of the evidence, meaning we would have chosen numerous indicators or methods to illustrate the same concepts.  The weight of the evidence, which includes monthly MACD, continues to favor a resumption of the current bull market over the start of a new bear market.  Time will tell.

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Published by

Gary

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