For almost two years, investors were spoiled with low volatility and high returns, but recent market action has rattled the cage.
Will there be more ‘cage rattling!’ If so, how much?
Sometimes a simple common sense analysis is the best one. KISS.
The February 11 Profit Radar Report stated that: “For well over a year stocks have almost exclusively gone up, slow but steady. For the past two weeks, stocks have gone down quickly. What’s next? The temptation and trap is to think two dimensional – up or down – since that’s most of what we’ve experienced lately. However, stocks could also go sideways for a period of time.”
On March 27, the S&P 500 was less than 7 points away from its February 9 close. Sideways indeed.
The February 11 Profit Radar Report also provided common sense long-term context via the chart and commentary below:
“1 – 2 – 3 is how we label the rally from the February 2016 low (according to Elliott Wave Theory – EWT). Wave 3 (wave 5 of wave 3 to be exact) extended much higher than normal (blue box).
Based on EWT, wave 3 is followed by wave 4, which is where we are currently at. Waves 4 are generally choppy, range-bound, long-winded, unpredictable corrections that retrace ideally 38.2% of the preceding wave 3. The 38.2% Fibonacci retracement level is at 2,536.
In terms of price, wave 4 has already reached its down side target. In terms of time, wave 4 would be unusually short.”
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Wave 3 lasted almost 15 month (November 4, 2016 – January 26, 2018). The February ‘mini meltdown’ inflicted an 11.8% loss in only 10 days. Is a 10-day pullback commensurate to a 15-month rally? Not really!
The Conclusion (and Solution)
After looking at dozens of different indicators and patterns, the February 11 Profit Radar Report concluded as follows:
“We’ve been looking to buy the dip. Is this the dip to buy? When boiling down all our indicators to a few sentences, we find that a bounce from Friday’s (February 9) low is probable. The bounce however may turn into a period of range-bound up-and-down market action, not an immediate directional up move. A path similar to 2011 (retest of original panic low). Hopefully volatility in coming days/weeks will provide a better (lower) entry.”
The chart below compares the 2011 correction with the 2018 pullback (blue box). In 2011, it took 25 days before the S&P tested (and briefly exceeded) the initial panic low. A similar pattern is developing now.
Here are 3 factors to keep in mind:
- This wave 4 correction does not have to exceed the February low to be complete
- Due to the duration of the preceding rally, this wave 4 correction could last longer than in 2011
- In 2011, it took almost 5 months for the S&P to rally from the its low to a new high
The March 24 Profit Radar Report outlined the ideal path going forward along with target levels and an actual price projection.
Naturally we will be alert for curveballs (one of which is over the top bearish), but if the S&P 500 follows our ideal path reasonably close, it should set up a solid buying opportunity.
Continued updates and analysis is available via the Profit Radar Report.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.
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