What a week for the U.S. stock market. Conventional technical analysis would have you believe that “the world is ending” because trendline support has been broken.
We disagree. Trendlines and support/resistances have too many false breakouts and breakdowns.
*Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For the sake of reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.
Volatility soared: medium term bullish for stocks
Volatility is mean-reverting.
Volatility is extremely high right now. The S&P’s 20 day Bollinger Bands have expanded by more than 5.5x in the past 3 weeks.
Here’s what happens next to the S&P 500 (historically) when its 20 day standard deviation (used in Bollinger Bands) expands by more than 5.5x in 3 weeks.
Yes, a lot of these historical cases are overlaps. But more importantly:
These signals are clustered in 1982, AFTER the 1987 crash, 1992, 1995, 2014, and 2015.
Volatility is mean-reverting, and it moves in the opposite direction of the stock market.
Short term will likely remain choppy
The short term (i.e. next few weeks) will most likely remain volatile. It is neither decisively bullish nor bearish right now.
The S&P has gone up or down more than 1% in at least 8 of the past 13 days. Historically, this led to more volatility in forward returns.
Meanwhile, the S&P’s 5 weekly RSI is extremely low. It is now at 13.
Here’s what happens next to the S&P 500 (historically) when its 5 weekly RSI falls below 14 for the first time in 3 months (i.e. right now).
