100% Normal And To Be Expected
In this week's video we noted that markets would be easy if they went up every
day during a bull market and down every day during a bear market (see
clip). As humans, when we see bearish charts, we tend to expect the market
to drop every day. Since we know markets do not work that way, it is prudent
to remind ourselves that any sharp drop (correction/bear market) is typically
accompanied by sharp countertrend moves.
Mental Preparation Important
If we know a countertrend move falls into "normal" territory, it is easier
to filter out the noise when the next one begins. Right now, the stock market
is in a downtrend. We assume it will remain in a downtrend until proven otherwise.
Therefore, any initial rally in 2016 will be treated as a countertrend rally
(aka noise) until the data proves otherwise.
If Stocks Bounce
The table below shows some reasonable levels that the NYSE Composite Stock
Index could rally back to, along with the percentage gain from the close on
January 20, 2016. The purpose here is not to predict, but rather to become
mentally prepared for an inevitable countertrend rally that will occur at some
point in the coming days/weeks/months.
Four Levels That Have Been Relevant In The Past
The chart below shows what may be a neckline on a weekly head-and-shoulders
pattern. The pattern is described here relative
to a similar pattern in 2008. It should be noted that as long as the market
stays below the neckline, stocks remain vulnerable to dropping further before
any countertrend move. As of January 20, the market remains below the neckline.
Weekly lows in August 2015 and January 2016 both occurred near 9,513 on the
NYSE Composite Stock Index.
9,732 was relevant in early 2014 and again in late 2015; it may be relevant
again, but this time "what once was support may now act as resistance".
9,886 found buying support after a sharp drop in October 2014; it may be relevant
again, but this time "what once was support may now act as resistance".
Stocks Continue To Drop Scenario
If the breach of the neckline, shown in the first chart above, holds, stocks
could continue to fall further as they did in 2008. Since studies have
shown predictions about where stocks will be in several weeks or several months
tend to be no better than a coin flip, we will continue to monitor and adjust
rather than anticipate and hope.
