Last week I indicated that I felt that things were changing and that we would more than likely see an undercut of the February low. By undercut, I mean that we will see a lower low. Are we starting a new bear market? Looking at the weekly chart of the S&P 500 above, you’ll see a lot of volatility. It appears to me that it is too early for the formation of a top, it has only been a couple of months since the highs were reached.
The parabolic move that would end in a market top is now off the table. So, let’s take a look at what has transpired over the last couple of years. You’ll see that the last major correction occurred in early 2016, a clear undercut of the October 2015 low. Once the bull market continued its run, we saw very little in the way of corrections going forward. So, if the bull market has more legs, it would only seem natural that we should see a correction similar to the bottom in 2016. The media tells us that the reasons behind the decline are trade policies or interest rate hikes. I would suggest that it is the markets correcting the excessive move that we have had since the bottom in 2016, trying to get the markets closer to its 200-day moving average (this did occur at the 2016 bottom). It is unlikely that we will move all of the way down to the 200-day moving average on this move down. It is possible that the markets move sideways and allow the 200-day moving average to catch up with the markets.
We could very well see some choppy trading over the two to three months.
A reminder of what this bull market looks like
We probably have a couple of weeks before a bottom is reached. Most likely would be a 38% retracement from the 2016 bottom. If we were to slice through that level in 5-6 days then we could move to a 50% retracement. It is really too early to pick a bottom, perhaps the earliest would be a week from this Monday or Tuesday. Then I believe the bull market will continue, though it won’t be as easy as what we had previously seen. The market will probably top in 2019, but you never really know.