What a master of teasing and mocking for the Market God! It
is apparently enjoying playing its tricks with traders by making unbelievably
wide swings and letting every trader wonder where it wants to go next. I have made a case for a suicide kiss days ago against its 50 DMA. After initial failed challenge, it has made several attempts to challenge it in the past two days and finally today, it seems it has successfully broken out this strong resistance. In the normal circumstance, it would be obvious that the correction is likely over and it is on its way to recover and ready to make new highs. But these days, the market is anything but normal. You see, in two consecutive days last week, the market were opening high but closing low. In a normal situation, it should be very bearish and the immediate trend would be going down. But it has been going up. So would a seemingly bullish move Friday be necessarily indicative of a real uptrend? I'm not convinced either. Nevertheless, for now we have to give the bulls the benefit of doubt and I have to give a medical diagnosis for the case as Suicide Attempt that has been saved for now.
More seriously, if history is any lesson to learn, it is useful to look at the past similar situations to see how the market behaved. While there are many 10% plus corrections in the past, there are not many with the severity of the oversold condition and speed of the plunge comparable to the current one. I can think about two in the past 30 years or so based on my reading and memory: one in Oct 1987 and the other in Aug 2011. In both situations, the S&P recovered about 50-60% in the following several weeks and both had retested the lows during the period, which could occur up to 6 weeks later. In other words, the market could make people feel like a smooth recovery with a seemingly new uptrend in the making for weeks, then all the sudden it strikes again to make a new low to surprise everyone. Am I sure we will see something similar this time? Of course not and the market may very well just go back to new highs without hesitation. But as Mark Twain put it, “History doesn't repeat itself but it often rhymes”. Market has a strong tendency to go against the crowd. Just remember this. Now let's objectively review the chart of S&P to see where it stands.
On the bullish side, the daily MACD is moving up with the up moves in the past week. And today's closing price has broken out its 50 DMA. If it can stay above and stabilize for a few days, it is bullish. On the bearish side, the current up days were not supported by strong volumes. And it has several important resistances to overcome before it can finally breakout to new highs. Right now, it is still roughly about 50% of the recent decline if using its intraday low of 2530 as the base. So it is still pretty much within the historical normal rebound range in the few weeks immediately after the plunge. Only the time can tell if it will repeat the history by retesting its low in the weeks ahead. I personally believe the chance is still high and therefore structure my portfolio as such. I'm holding my shorts as hedge for possible another panic selloff that can come without warning, while I can still enjoy the recovery with my long positions (long term holdings and recent buys during selloff) that I'll keep anyway. Ultimately I have no doubt the market will fully recover and make new highs this year although I'm not so convinced a V shape recovery is in the work as of now.
More seriously, if history is any lesson to learn, it is useful to look at the past similar situations to see how the market behaved. While there are many 10% plus corrections in the past, there are not many with the severity of the oversold condition and speed of the plunge comparable to the current one. I can think about two in the past 30 years or so based on my reading and memory: one in Oct 1987 and the other in Aug 2011. In both situations, the S&P recovered about 50-60% in the following several weeks and both had retested the lows during the period, which could occur up to 6 weeks later. In other words, the market could make people feel like a smooth recovery with a seemingly new uptrend in the making for weeks, then all the sudden it strikes again to make a new low to surprise everyone. Am I sure we will see something similar this time? Of course not and the market may very well just go back to new highs without hesitation. But as Mark Twain put it, “History doesn't repeat itself but it often rhymes”. Market has a strong tendency to go against the crowd. Just remember this. Now let's objectively review the chart of S&P to see where it stands.
On the bullish side, the daily MACD is moving up with the up moves in the past week. And today's closing price has broken out its 50 DMA. If it can stay above and stabilize for a few days, it is bullish. On the bearish side, the current up days were not supported by strong volumes. And it has several important resistances to overcome before it can finally breakout to new highs. Right now, it is still roughly about 50% of the recent decline if using its intraday low of 2530 as the base. So it is still pretty much within the historical normal rebound range in the few weeks immediately after the plunge. Only the time can tell if it will repeat the history by retesting its low in the weeks ahead. I personally believe the chance is still high and therefore structure my portfolio as such. I'm holding my shorts as hedge for possible another panic selloff that can come without warning, while I can still enjoy the recovery with my long positions (long term holdings and recent buys during selloff) that I'll keep anyway. Ultimately I have no doubt the market will fully recover and make new highs this year although I'm not so convinced a V shape recovery is in the work as of now.
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