Several weeks ago I suggested that we had seen the “Mark of the Bear” stating:
“The Bulls have remained firmly in charge of the markets as the reach for returns exceeded the grasp of the underlying risk. It now seems that has changed. For the first time since 2007, as we see initial markings of a potential bear market cycle.”
I followed up that analysis by suggesting the markets would likely experience a “sucker’s rally” which is extremely normal following declines in the market. These short-term reflexive rallies generally suck inexperienced investors into the market to “buy the dip,”while more experienced investors use the rally to protect capital against further declines. As I stated then:
“One thing is for certain, if the market does muster a rally strong enough in the week’s ahead to retest the previous bullish trend moving average, it could very well be a ‘sucker’s rally.’ Any failure will likely mark the beginning of a new bear market cycle. And, just as before, there will be no warnings, no announcements by the media, or acknowledgment by Wall Street analysts. However, the consequences will likely be just as severe.”
I began addressing at the end of August that the market collapse had gotten extremely oversold. As such, that set up the probability for a reflex rally back to previous support levels.
The chart below is the orginal from the August 25th report mentioned above. It shows the oversold condition. The blue dashed line shows the potential short-term reflexive rally that would likely occur.
Here is that same chart updated through yesterday’s close.
As you will notice, the reflexive rally, and subsequent failure, have tracked the original predictions very closely up to the point.
With the market once again very oversold on a short-term basis, it is likely that the markets could manage a weak rally attempt over the next few days. The good news is that such an attempt will provide individuals another opportunity to reduce portfolio risk accordingly.
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