In 1976 I began a study in technical analysis with the Stock Market Institute. Much of what we studied was based on the work of a gentleman named Richard Wycoff. One of his simple studies analyzed market cycles, they are still very relevant today.
No one really knows where we are in this cycle. Markets put in tops during the distribution phase, and this takes place over a period of months. So, while we have experienced a correction, we really need to see how the markets react over a period of time. The markets give us clues, just like the warning of a potential short-term top that I referred to on January 23rd of this year. The S&P 500 has corrected back to the 200-day moving average, the Dow and NASDAQ Composite are very close. We should see a bounce in the near term, perhaps as early as Monday, however, we could see more testing to begin the week to satisfy the other indexes.
The S&P 500 touches the 200-day moving average line
Some analysts feel that the market has already topped based on financial and political news. Why are we adding to our budget deficits in a time of relative strength in the economy? Usually, these moves are made when economies are weak and needing stimulus. Perhaps this is a warning of difficulties to come, you just can’t keep on printing money, which we have done for years, without some consequences.
There are others who believe that we will have a V-shaped recovery that will take us to new highs and a final bubble top. If I were to stick my neck out, I would dismiss the idea that the bear market has begun. And we really won’t know if this bull market will catapult to new highs and a final bubble until we observe the actions of the market.
IBM – An example of the topping process
IBM put in a top during 2012 and early 2013 and the correction didn’t end until 2016. This chart looks very similar to the Wycoff cycle top shown at the beginning of this post. As you can see it took time for the professionals to distribute the stock, once it broke support the stock crashed. This is the kind of action that we should see in the stock market if we were going to see a market top.
I will continue to keep you up to date with the prospects for the market, only tell will tell.