Investing Is About Assessing Probabilities
No one knows what the future looks like, nor do they know where the stock market is headed. The best we can do is to assess probabilities given the information we have in hand.
2011 Can Provide Some Insight
We are not big fans of saying “2015 looks like 2011” since it creates bias regarding future outcomes. However, we can learn from studying how past corrections and subsequent rallies in stocks unfolded.
In 2011, the S&P 500 made a double bottom and rallied hard off the October low (similar to 2015). Regardless of the year, during a bullish trend, stocks typically do not retrace more than 61.8% of the rally during normal “give backs” or countertrend moves. As shown in the chart below, the general rule held true to form in 2011. The S&P 500 retraced almost exactly 61.8% of the initial multiple-week move off the October 2011 low. After the normal retracement, stocks continued the bullish trend and pushed higher into 2012.
Using Retracements As A Reference Point
If the rally off the September/October 2015 low is a sustainable bullish uptrend, we would expect any countertrend or “give back” move to stay within the Fibonacci retracement levels shown below. On Friday, November 13, the S&P 500 closed near the 38.2% retracement level, which could act as form of support.
If the S&P 500 closes below the 61.8% retracement level, which stands near 1964, the odds of further weakness start to increase and the odds of stocks resuming the prior uptrend begin to decrease. Can retracements exceed the 61.8% level and be followed by a resumption of a rising trend? Yes, the concepts presented here speak to probabilities rather than certainties.
Concerns Increase After Last Week’s Selloff
As noted by Ryan Detrick, the magnitude of last week’s decline in stocks falls into very rare territory when taken in the context of a strong six-week rally.
Therefore, it is prudent to keep an open mind about worse than expected outcomes over the coming weeks and months. This week’s video covers numerous concerning developments.
2020 Is A Key Battleground
The market has provided us with another short-term reference point of note. Three lines associated with recent areas of resistance intersect near 2020 on the S&P 500. The dotted blue line is based on closing prices. The expression what once acted as resistance may now act as support tells us to respect 2020 as an area where buyers may begin to surface. Concerns would increase with a sustained downside break of 2020.
Thanks for reading.
Twitter: @CiovaccoCapital
Author or his funds have a long position in related securities. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
