Have you been enjoying the whipsaw the market has been providing us this last week? Does it remind you of anything?
To me, this feels like the market action we experienced in the last half of October of 2018. And, just like the action we experienced when it completed, it provided us with a strong rally thereafter. While the rally we experienced in early November was not able to take the market to a higher high, I am still not certain as to whether the one we experience after this past week’s market action will.
As far as investors’ sentiment is concerned, it seems as though they were turning more bullish earlier in the week despite the strong declines we were experiencing. As the Bespoke Investment Group highlighted on Friday:
“Declines over the past week have been some of the sharpest of 2019, but in spite of this price action, investor sentiment - as measured by the AAII's weekly investor sentiment survey - has yet to blink. In fact, 43.12% of survey respondents reported bullish sentiment up from 39.02% last week. While still within its normal range by historic standards (within one standard deviation of the historical average of 38.23%), that is the highest degree of bullish sentiment since October 4th of last year, just before the market rolled over.”
Moreover, I am seeing discussions now about the “Trump put,” which makes investors quite confident that the market will not see another serious correction. Well, consider how much the “Fed put” was unable to prevent 20%+ market declines in the past, and I think you will understand how likely the “Trump put” will work to prevent similar declines.
But, the structure of the market action we are seeing is certainly suggesting to me that the market is attempting to develop a larger degree top. While I cannot say that I see the top as having been struck already as a high probability just yet, I can now say that I see that potential as more likely than not. And, even if the market is able to make a marginally higher high in the 3000 region in the coming weeks, I believe the risks of trading for that potential have risen significantly.
As you know, I track the market sentiment based upon the structure of the market action. And, the market action suggests that if we see a lower low relative to Friday early in the coming week, it puts me directly into the bearish camp. While the market may still whipsaw in the coming weeks even if we make a lower low early in the coming week, I would be watching the 2785SPX region carefully as our next signal level. Depending upon the structure of the market as we approach that region, a break of that region of support could open the trap door for a waterfall event of several hundred points to the downside. In fact, I would almost expect action similar to what was seen in the fall of 2018, in January of 2016, in August of 2015, and in August of 2011.
I will clearly update our members over the coming weeks during this crucial time in the market as to what I am seeing, so you will have prior warning for that potential. But, please remember that the next larger degree drop we see in the market as we look towards the last half of 2019 is going to be a major buying opportunity. I still see the market as setting up to rally to the 3500-4000 region as we look towards the 2022/23 time frame. So, the next major market decline I believe we will see in the last half of 2019 will likely be your last buying opportunity for that potential rally I see.