In this past weekend’s newsletter, I discussed the timing and process of reducing equity risk in portfolios to minimize the ongoing deterioration in the markets.
“On a very short-term basis the market is oversold and the bounce on Friday was JUST enough to close above the October lows support at 1860. Any continued rally next week should be used to further reduce equity risk and rebalance portfolios.”
I have added the dashed blue line showing the formation of the asymmetrical bubble pattern that has been the hallmark of major market peaks in the past. While this pattern is not a definitive indicator of the entrance into a cyclical bear market, it does indicate that the easiest path for market prices is currently lower.
However, market bulls will argue, and correctly so, that the continued retests of the 1860 level by the markets is building bullish support for the market. However, this action is not uncommon at major market peaks as it takes time to erode bullish “hopes” to the point those supports finally give way.
With the markets once again oversold after last week’s fairly brutal sell-off, a rally is expected over the next couple of days to allow portfolio risk to be rebalanced. That rally could take the markets back to the previous resistance of 1940 (about a 4% push) from current levels. Such a rally would be enough to suck many of the “bulls” back into the markets pushing markets back into overbought territory and setting up the next decline.
Most likely the next retest of the 1860 lows will fail and, as we move into the summer months, the markets will begin to push to lower levels of support.
EXPECTATIONS VS REALITY
The analysis above, while considered “bearish,” is just an honest assessment of price trends currently. You can dismiss it, ignore it, and doubt it but that won’t change the potential negative impact to your personal wealth.
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