Last week we reviewed the previous bull runs in terms of trading days and percentages and compared this data to the current run to help answer your question, “Do you see a correction, around the corner?” Today we will view another chart to give additional clues to determine if the next pullback is just a correction or a signal the next bear market is starting — don’t miss it!
In my seminars I teach my students, many error by making their analysis far too complex and difficult. In my opinion, simpler is better. “Simple” is represented in the chart I designed for today’s analysis. Per my chart of the S&P 500, each bar represents one week. I go back to the first of the year to see the level at which the market found support (price floor). The blue line is my signal line and has been successful at identifying price support. Each time the price or value has touched this line, buying came in. In addition, the bottom box represents the money flowing in and out of the market.
How do we read this chart? Since I have identified the blue signal line as price support, as long as the price trades above it-bullish momentum is intact. When price closes and stays under the blue signal line then a larger scale correction is taking place.
In addition as long as the green bars stay in positive territory in the lower box then the money is still coming into the market in terms of accumulation/buying. When the bars turn negative/red this represents negative money flow/distribution or more selling than buying.
As stated last week, a pullback of 5 to 10 percent would be healthy for the market. Per the chart you can see a 5% pullback from the recent high would take the S&P 500 to 1717, just above my blue signal line. Speaking of the signal line, all investors should know how to determine a signal line for each and every security in their portfolio. Do you have a signal line for each of your securities? If not, why?
Baring an exogenous event, (that I pray does not happen), as long as the Fed keeps pumping billions into the economy each month and as long as corporate profits do not fall off a cliff, after a healthy pullback, I see continued upside in the months to come.
The last time investors were enjoying a multi-year run and were contemplating if the market was making a correction or a major pullback, was in 2008. On September 16, 2008, I was warning investors to have downside protection and that a perfect storm was developing for a major market selloff. This was 12 days before the DOW dropped 770 points in one day. Those that took my advice were glad they did. The paper running the story was the Southern Illinoisan and the writer was Becky Malkovich.
How did I come to that conclusion? By using my proprietary charts similar to these I use in my columns. Next week I will design a chart to give additional clues to see if we are in the same scenario-don’t miss it!
DAVID O. ENGLAND is an associate professor of finance at John A. Logan College and founder of the Eye on the Market-Training Academy. He can be reached at firstname.lastname@example.org. The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short, or hold any stock or investment product is a direct result of your own decision, free will, and research.