There are two ways to look at last week’s decline in the broad stock market…
The bullish view is that the pullback was just a small correction designed to relieve the short-term overbought conditions, and set the stage for a rally to a higher high.
The bearish view is that last week’s decline marked the top of a parabolic move for the stock market. And, following a brief oversold bounce, stocks will fall further from here.
I tend to favor the bearish view. Let me explain why…
Parabolic moves always end badly. And, they often end with the stock giving up almost all of the gains from the entire move.
Let’s look at one of the best examples of a parabolic move ever – Bitcoin back in late 2017…
The black line on the chart shows the move. The rally started in mid-September 2017. And, it gained momentum until the chart went straight up – parabolic – in mid-December.
Then, Bitcoin suffered a sudden sharp decline nearly all the way to the 50-day moving average (MA) line on the chart (marked by the red arrow). That decline was followed quickly by an oversold bounce back up to just above the 9-day exponential moving average (EMA – marked by the blue arrow).
From there, Bitcoin declined again. And it kept falling, over time, until the entire gain from the parabolic move was wiped out.
Let’s look at a more recent example – Tesla (TSLA) from earlier this year…
The parabolic rally in TSLA started last November, and peaked in February. TSLA then fell sharply, almost all the way down to its 50-day MA (red arrow). And, that move was followed by a bounce back up to the 9-day EMA (blue arrow) before TSLA started falling again.
By the time the decline was over in mid-March, TSLA was almost all the way back down to where it was when the parabolic move started last November.
Now, let’s look at the recent action in the S&P 500…
The rally over the past five weeks has been nearly straight up, until last Thursday’s sudden and sharp decline.
On Monday, the S&P 500 traded all the way down to 2965 – nearly back to its 50-day MA line. Then it bounced.
That bounce carried over into yesterday and pushed the S&P 500 rally back up to, and slightly above, its 9-day EMA.
Ultimately, though, if the rally over the past five weeks has indeed been a parabolic move, and that parabolic move ended last Thursday, then the S&P should give back all of the gains from the recent rally.
That gives us a downside target closer to 2800.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Brian and Elaine share their thoughts on current market conditions…
There’s craziness in the market, Jeff. I recently read the market is basically running off something that was termed FLOW. The 401(k)s are dumping in money with nowhere to go, and all the quant programs are lost because this has never been experienced.
The market is running on FLOW and it just keeps coming in. The market is going up since quants don’t know what to do, and individual buyers see it going up, so now they dump in more money so they don’t miss the boat. It’s pure craziness!
– Brian
I haven’t opened a brokerage account as of yet, nor have I started any trading, but I’m listening to the training videos, reading the reports, and trying to understand what I’ll be doing.
However, your subscription is so relevant in every way. I can see the thoughtfulness that was put into this overall presentation… and to think it didn’t even cost me $20!
As I read and listen, I write down the questions that pop into my head. I’ll send those later, but I’m really looking forward to starting the trading process!
– Elaine
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].