Harder Markets Are Typically Followed By Easier Markets

By Chris Ciovacco

S&P 500’S BREAKOUT ATTEMPT

The S&P 500 closed above 2532 on October 3, 2017, and eventually rallied to 2872 on January 26, 2018. The S&P revisited 2532 on February 9, 2018.  Last Friday, the S&P 500 closed above 2872.  Therefore, price stayed inside the orange box for 325 calendar days.

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The S&P 500 broke above the March 2018 highs in July.  The same “it is important not to overthink singular outcomes” concepts apply to the present breakout attempt:

We all want a clean breakout and then a push higher. Unfortunately, that is not how it always plays out in the real world.  A successful retest of a breakout attempt can (1) drop back and stay above the orange boxes, (2) drop back to the orange boxes, or (3) drop back into the orange boxes before pushing higher.  On a successful retest, the important common factors are (a) breaking out, (b) dropping back toward the box in some fashion, and (c) making a higher high above the most recent previous high. In the real world, there is no neat textbook definition about what a successful breakout looks like.

Since, in the short run,  it will have little impact on the bigger (and much more important) picture, experience says overthinking breakouts tends to be a distraction.  No single event makes up the weight of the evidence, including the outcome of a breakout attempt.

TRENDS AND CONSOLIDATION

When the S&P 500 was trending strongly in late January 2018, the expression “the market needs to consolidate its gains” applied.  It is not unusual for markets to alternate between periods marked by strong trends and periods marked by consolidation.  The concepts are based on price, and have nothing to do with how the orange boxes are drawn.  We could remove the orange boxes below and the concepts would still apply.

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TIME FOR AN EASIER MARKET?

The answer to the question above falls in the TBD category.  The longer the S&P 500 can stay above 2872, the more meaningful the breakout becomes.

THE BIGGER, AND MORE IMPORTANT, PICTURE

Under our approach, when the long-term trends are strong and favorable, we prefer to remain invested during bouts of normal volatility.  Given most major U.S. indexes have posted new all-time closing highs, a fair question may be are things starting to look like the period leading up to a 1987 or 2000-like peak?  This week’s video reviews present-day facts in the context of stock market history to address logical topping concerns.  After reviewing the facts, you can draw your own conclusions.

DAY BY DAY

Even if the S&P 500’s breakout holds and stocks march higher (TBD), the expression uses “easier” and never hints that anything related to the stock market will be easy.  As always, if the facts change in a meaningful way, then our assessment of the probabilities will need to be adjusted.

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Published by

Gary

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