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August 15th, 2022
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?
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