The Stock Market’s Bend but Don’t Break Action
In the world of sports, we often hear the phrase “bend but don’t break” in reference to a team’s style of defense where they try to avoid giving up the big play. Well, the last few weeks the stock market has been in one of these bend but don’t break scenarios.
From the below chart, you can see the market was trending higher coming out of the 2011 European Financial Crisis (green trend line). Today we are in a sideways consolidation pattern where the market is stuck between the two blue lines. This type of market is similar to a sprinter needing to catch their breath between races. Right now, the market is bouncing back and forth between the two blue lines while it determines whether it will resume its run higher, or turn negative suggesting lower lows ahead (indicated by breaking below the lower blue line on the chart).
Last Thursday (2/11/2016) it looked like the market was on the verge of dropping below the January low setting a new low point for the year. Fortunately for the bulls, they were able to mount an afternoon rally to keep this from happening. Then a strong 2% move on Friday kept the support levels unbroken.
Here is the chart of the Dow Jones Industrial Average (DJIA) going back to 2011 on a daily basis:
So what happens next?
To answer this question, I am going to share commentary from well know master technical analyst, Martin Pring. In his latest analysis of the markets he shared the following:
Sometimes when the market declines, things actually improve, and that’s what may have been happening this week. In my most recent article, Intermediate Indicators Signal a Rally but Remember It’s a Bear Market, I pointed out that several indicators had reached the kind of levels from which rallies, even in the worst of bear markets had consistently been launched…
…Now take a look at the current situation, which so far appears to be repeating this positive setup. It gets better.
Pring provided a long listing of charts to support his view that the market could rally. He provided data on the bond market, commodities, US dollar, as well as, historical patterns seen in other market periods.
To further analyze the potential for a market rally, I ran a seasonality study on the S&P 500 over the past 20 years. From this, we can see that March has averaged gains 63% of the time, April has been up 74% of the time and May has been (slightly) positive 58% of the time.
Here is the chart:
To conclude, the market may be setting up for a rally, but caution is still warranted. The current market trend has been negative and trying to paddle upstream is an exhausting exercise.
As we always say, when the facts change so shall we.