As I type, S&P futures are down~2.6% from Friday’s close. Where does this take SPY in terms of the bear flag I wrote about on Friday?
Above is a chart with 5 minute bars of the S&P 500 eminis.
Friday I wrote about the big bear flag that is developing on SPY.
If -2.6% is subtracted from the Friday SPY closing value of $117.85, the theoretical SPY open for Tuesday is $114.79. An open at this level puts SPY right at the lower line of the bear flag. Observe the green circle below for the target.
I’m looking for a bounce at the area of ~$115, but should that not happen, I will be changing my position from “tradeable bounce” to “looking for new lows.”
$110.00 and then $105.00 would be my next SPY technical targets after the failure of this bear flag.
I’m writing about the possibility of this event (breakdown of the bear flag) with a calm and reserved style. However, should this actually happen, I expect it to be violent and volatile. Up to now, whether or not we are in a new bear market has been a topic of semantic debate. If the market breaks down from the bear flag to make new lows, it will remove any doubt.
There is not much time to act. I always hesitate to give people the advice of reducing exposure in their 401Ks and 403Bs, but if the market breaks down to new lows, I expect we are in for another long and protracted bear market. The problem is that if you reduce exposure and we don’t break down, what do you do? Do you buy back in right away? Lucky for me, I don’t have to answer that question since I don’t manage your retirement account. Just be very cautious and aware of what staying fully invested here can mean. Choosing to stick it out at this point may mean losing 20 – 40% before another bottom is found.
Nice post Wood. I’ve got exactly that problem with some of my LT holdings. Some things that I thought I’d like to hold just don’t pass the test if we get another leg down. We’ll see what tomorrow brings.
I’m already at 50% cash in my LT holdings. I logged into the account Wednesday and almost took the other 50% out, but didn’t. Wish I would have.
I will watch tomorrow to see what happens. I would rather take the other 50% off on a bounce, but I might take it off if we have a serious breakdown.
If a bounce occurs, at what level would you sell in to it?
At the top 🙂
Seriously, that is hard to say. Technically, a bold move would be to wait until we rally to the 50 day moving average.
A conservative move would be to look to sell around $120.00
You could also use something like RSI2 to gauge when the next overbought status occurs.
Since I’m young, I’m not too worried about cashing out the retirement, actually looking to add cash to it if we drop. If we do confirm and enter a legit bear market, based on the charts what would the expected time frame be? Months? Years? A Decade (I hope not).
Mad, I would be looking to buy more here with cash if I thought that another 5-10% down were all the market had left to fall. I’m afraid it will be 20 – 40% down.
Look at what the market does during a recession. It is not pretty.
A true secular bear market generally lasts about 17 years. By my calculations, we are about 11 years into the 17 necessary to complete the cycle.
What we’ve seen after 2003 and again since 2009 are just cyclical rallies within a secular bear market that started around 2000.
New lows here just confirm the bear is for real. I would have to run some studies of what happens after the 2nd leg of a bear market is established in order to determine a time frame for a bottom.
agreed on each point except I’d note that since WW2, we’ve had alot of recessions. per wikipedia, 45, 48, 53, 57, 60, 69, 73, 80, 81, 90, 01, and then the big one recently.
the corresponding market selloffs were, per an old article by bespoke investment group on seeking slop
46 -28%
48 -21%
notably no apparent “bear market” in 53, just a little pimple like the july 09, november 09, or jan 2010 ugliness
56 -22%
61 -28%
66 -22%, apparently not associated with a recession, like last summers -16 or -18 or whatever fiasco, also no recession
-36% for the 70 recession
-48% for the nasty bottom of the 70’s era bear market and associated severe recession
-27% and -33% for the double dip mess in the early 80s
a non-recession related mess with Black Monday where we sold off 33%
a selloff of 17% for the early 90s recession (also a big real estate bubble bursting, but NOT ONE THAT MURDERED CONSUMERS AS MUCH DIRECTLY, more a CRE thing if memory serves)
and then the panic in the late 90s, and the popping of the nasdaq bubble, the massive selloff culminating in early 2009 and the mess last summer and…
this one. There is precedent for a recession with a selloff smaller than this one (precedents, actually), and to drop 20-40% from where we are now is an outlier event. That’d bring us to S&P 700-900, a drop of 33%-nearly 50%.
50%ish drops are intensely rare, and we sure didn’t start from anything like a true stock bubble this time (i would argue that we did in both 07 and 00).
another 5-10% from here is about the norm for recession selloffs. 08/09 was a true panic, and … companies had true troubles and they just don’t have that many troubles today. This selloff has been acting quite a bit like the 08/09 selloff – financials and companies with debt are getting sold to high heaven and other things are holding up better.
So I would debate the historical necessity for the market to really tank should we fall into recession, and I think a more likely outcome is something like last summer. We sell off to 1100 again or maybe lower, and the time to buy is when
-we have a sea change in situation due to government intervention of an intelligent kind (last summer wasn’t really due to actually helpful intervention, but QE2 created this sea change)
or
-we get a retest kind of bottom on notably lower volatility, fewer new lows, etc. like August of last year or March of 2009.
Good points checklist. I’d like to add though that a recession has not been officially declared. I believe that we want to measure what happens after the declaration, and I believe that is what Bespoke has done. Accordingly, we still might expect another 20% tacked on to whatever we will have already lost.
Still, I can understand that the market is pricing in recession, right now, and that might soften the blow, should we actually realize one.
No, that was total peak to trough in recessions and bear markets, not post declaration of recession.
I think if we put in another swing low and don’t break our previous low, we rally back to the 200 day before we head down further mainly because snap back bear rally last longer than the last one.
A rally to the 200 day would be sweet, but I do not think we’ll see that any time soon.
However, if we make a double bottom here, that is, we make a slightly lower low on high volume, and then rally, that rally may indeed be intense.
I just don’t see us putting in a double bottom here, but that is only my own intuition speaking. In essence, I’m just guessing with my gut that we’ll break to new lows instead of putting in a double bottom.
This comment is giving thumbs up to all comments, kicking ass and taking names!
IMO, an ideal possibility is that we are becoming rangebound between 1100 and 1235-1250. I would heartily welcome that scenario as it would simplify going long near the bottom and short near the top. Your lines in the sand are clearly defined. Granted, the range will eventually break, but hopefully you can take enough money out of the market by that point that your losses would be negligible.
Absolutely. I have found that it is not as easy as it seems, but that is definitely the idea.
Does today’s stable market in Europe and the Swiss Peg to Euro help the chance of forming a double bottom (in your opinion), and is the 200 day on the S&P around 1228?
Technically, a double bottom needs to make a lower low, on lower volume than the previous low. I do not think that will happen today. The 200 day on the S&P is at 1284, today.
If we can bounce off the lows today would you commit more capital or just hold what you have.
I would commit capital for a short term up swing of a few days. But it would not be all of my capital. My long term accounts I will hold what I have and attempt to reduce exposure on the bounce.
did you commit capital yet?
No, I only trade the open or the close.
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how long would you wait to confirm the bounce won’t happen, 1-2 days?
It bounced nicely off the bottom channel line. The support and bounce have been confirmed. Now we just cautiously watch to see how high the bounce can take us.
now it is just under 115. now do we get 111.9?
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