I know what you’re thinking (or at least a good portion of you): “Bear market? We are around 2050 in the S&P 500, oil is above $40 per barrel, and because of the Federal Reserve’s statement last week, the stock market is poised to rally further going forward.” Not so fast my friend. We are at a very interesting point in the 7 year bull market on a technical basis, and we should know within the next 2 or 3 months whether the bulls or bears will be winning this battle for the next year or so. The first chart below (weekly data points) shows the long term trend support line for this bull market since the 2008 market crash:
As you can see above, we tested this long term trend support line in both early January and February of this year, but both times it bounced back which is a healthy sign. One thing that is undeniable though is that we have been in a slight downtrend for the past 8 months:
In the chart above, you can see that we have established both lower highs and lower lows since the middle of last July. This is indicative of a downtrend on a technical basis and the 2 parallel lines on the chart demonstrate the slight downward channel that we are trading within at the moment. So is this recent downtrend simply a retracement of the 7 year long bull market trend? It should be noted that a break of significant recent highs during the past 8 months would be a very strong sign that the bull rally is fully back on:
If we were to have a weekly close above 2099.20, or better yet 2126.64, that would be a very strong sign that the last 8 months was just a retracement. Here’s a chart of the last year with daily data:
Price action over the next month or two should be quite interesting in terms of whether support or resistance will be broken. As you can see above. a daily close above 2109.79 (or better yet 2130.82) would be quite significant, and would indicate that the recent 8 month downtrend has reversed and that the long term 7 year rally is fully back on. Conversely, any daily close below 1829.08 would be a bearish signal only to reconfirm the recent downtrend. The last time that the S&P 500 broke a significant horizontal support line of 1867.61 was in late January through early February, only to eventually rebound to where we are today. In the bigger picture, I believe that we will be in a consolidation phase for the next 2 to 3 months, and that is best represented in the chart’s below “price wedge”:
When a resistance and a support line are converging, this is called a “wedge” or “triangle”. This is a highly unsustainable situation in which price will likely break out significantly to the upside or downside of the wedge. If I were to guess (and everyone’s speculation, including the “experts”, is just a guess), I would say that we will likely go down from here, yet maintain the integrity of the support and resistance lines of the wedge for at least the next 2 months. From a fundamental perspective, many on Wall Street expect for there to be another Federal Reserve interest rate hike in June, which would provide the perfect backdrop for a breakout of the wedge in the technical analysis that I laid out here. If the Fed raises rates as expected and gives guidance for even more interest rate increases this year, we should expect for there to be a significant breakout to the downside. Conversely, if the Fed does not raise rates, which would be contrary to market expectations, it would be perfectly reasonable to believe that the Federal Reserve could be taking a much more accommodative monetary policy, resulting in a significant breakout to the upside. It should also be noted that up or upward wedges, which this slightly is, tend to result in upward breakouts. My best guess is that the Fed does not raise rates in June, we will get a huge rally, and the 7 year long bull market trend will remain intact.
While it is fun to speculate on where the market is going in times of uncertainty like we are currently experiencing, you don’t have to be great at technical analysis or have a crystal ball in order to profit from the market. By utilizing one our algorithmic CTA programs, all you have to hope for is short term volatility in either direction in order to profit from the market. Regardless of your viewpoint or trading strategy, I hope that you trade with Acumen.
Futures trading involves risk of loss and is not suitable for everyone.