The bear market is over! How about that for a bold statement? Before I get to my theory, let’s take a quick look at the week ahead to get you ready for a busy week of trading.
Tuesday – Housing Starts and Permits – expected to decrease
Tuesday – Industrial Production – expected to increase (prior month was a decrease)
Wednesday – Retail Sales – expected to be flat. Retail numbers are being inflated with inflation as people are spending more but buying less.
Wednesday – FOMC Minutes
Thursday – Jobless Claims expected to increase to 265k
Thursday – Philadelphia Manufacturing Index – expected to rebound slightly, but continue to be negative
Thursday – Existing Home Sales – are expected to fall. Sales have fallen every month since February, yet prices continue to climb
Now, let’s take a look at an indicator that has been used to predict the end of bear markets and see if you agree that the worst is behind us.
Why do I say the bear market is over? I am going to use something called the Fibonacci Retracement tool. If you take the high from early 2022 and the low from mid-June, you can see that we’ve marched up to cross over the 50% retracement level. I’m using the S&P 500 ETF, SPY, as shown below.
Go back through history and look at every time we’ve entered a bear market, a decline of 20% or more from the previous high, and then draw a Fibonacci Retracement (available on all major charting platforms) from the previous high to the bear-market low. Every time the S&P 500 comes back up and crosses above the 50% retracement level has shown an end to the bear market!
Once it crosses the 50% retracement level, it starts a new bull market and is higher a year later. Of course, that could change this time around – it’s not like there’s a lot of data about coming out of a pandemic.
Ok, I know you’re saying, that’s easy to go back and do because you now know what the low was. How would we do this in real-time? Once the market enters bear territory, you draw from the high and keep moving the lower point of the drawing every time the market makes a new low.
I’ll show you how you can do this.
Mid-May is when we officially lost 20% from the high. Draw the retracement level to the known low at that time. The 50% retracement level was $429.62. We never got close to that level before making new lows. You can see from the chart above that we stalled out at the 38.2% level.
As the market made new lows, you would redraw the lines using the retracement tool.
Now let’s take a look at the first chart again.
After redrawing the Fibonacci Retracement using the new lowest-low, the 50% retracement level moved down to $421.42. Now that we’ve retraced by 50% from high to bear-market low, I’m calling the end of the bear market and the start of a new bull market.
How far do we go from here? My price target for the SPY is now $448, or around 4483 on the SPX. That said, I still think we’re overbought at these levels and won’t be surprised if we have a pullback before marching higher.
What do you think? Do you agree? Or are we going to retest the lows? Go sideways?
If you have any questions, comments, or anything we can help with, reach us at any time.
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