The S&P 500 has reached its 61.8% retracement and is now facing short term resistance (as expected).
Let’s determine the stock market’s most probable direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.
*Probability ≠ certainty.
The stock market is not “breaking down”
The S&P 500’s 21 day moving average (1 month moving average) crossed below its 252 day moving average (1 year moving average) this Tuesday.
Traders who use MACD will see such “breakdowns” (similar to death crosses) as bearish signs.
They’re not.
This is the first time the 1 month moving average has crossed below the 1 year moving average in more than 2.5 years (since early-2016).
When such long uptrends end, the stock market can experience more weakness over the next few weeks/months, but it usually goes higher 9-12 months later. (This is also how earlier this year, we knew that January 2018 wasn’t the bull market’s top). Strength begets more strength.
Here’s what happened next to the S&P 500 when its 1 month moving average falls below its 1 year moving average for the first time in at least 2 years.
As you can see, the S&P tends to go up 9 months later.
Short-medium term is more mixed
Our studies over the past 2 weeks have been consistently medium term bullish for the stock market.
Now that the stock market has rallied, the medium term’s returns are more mixed. Some studies are medium term bullish (as highlighted yesterday), and some studies are medium term bearish.
Here are 2 medium term bearish studies.
The S&P 500 has rebounded rapidly. The S&P’s 14 day RSI has gone from under 25 to over 55 in less than 3 weeks, which is very fast.
