Here’s Why The Stock Market May Fall By As Much As 5%

I have said for a long time, that I see the S&P 500 breaking out of this recent period of consolidation and moving significantly higher from current levels. However, I have been growing increasingly more cautious over this past week. Mostly because I am beginning to believe that we have one more pullback in store before that next rally finally occurs.

I have been sharing these thoughts in my video commentaries throughout the week. Over the next month, we could see a rather sharp 3 to 5% pullback. The reason for that is the index is at least for the moment is showing some signs topping out. Premium content: The Stock Market Rally May Be Nearing A Peak – Get the first two weeks to try it out, nothing to lose.

First, the S&P 500 was rising with a very nice uptrend since the August lows of 2825. It appears that uptrend may have finally been broken. Additionally, there is a pretty sizeable gap that needs to be filled around the 2935 region, which when measured from the intraday high on September 19 of around 3,022 is just about 3%. 

S&P 500, spy

Additionally, the number of stocks trading above their 200-day moving average has now reached the peak of the recent range and is already starting to give back some.

S&P 500, spx

The number of stocks trading above their 50day moving average has climbed to the peak of the range.

S&P 500, spx

The comparison between the 50-day and the S&P 500 is pretty clear.

S&P 500,

The Next Leg Higher

What is also becoming clear is that the index is likely to rise significantly in the months to come. Below is a new chart I have been working on, and I find it rather interesting.

The chart goes back to 2011 and shows that there have been three periods since that time that saw at least one pullback of 15%, and a period of sideways consolidation of roughly 20 months.

In both 2012 and 2016, once the index broke above its resistance level, it then proceeded to test that resistance level for four months. It was on the 5th month that the index advanced higher by 50% starting in 2012, and by 35% in 2016.

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Comments

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Richie Scalia 4 weeks ago Member's comment

I'm not the brightest bulb on the chandelier, but i have my concerns. Although i see significant validity in your assumptions, theory, and conclusion based on your parameters, using from 2011 to present, but strictly from a technical standpoint. Would it not make sense to research what the economy was showing, and where it was headed from a sentiment, as well as a monetary standpoint both domestically and globally?

Were there any trade tensions, or global unrest due to the events like last weekend with Iran? I cannot lump President Trump in with these factors because although there is significant (all over the globe) unrest with his behavior and decision making style from a political stance, He has created upward trend in the markets however volatile they have become.

What if you went back further to validate your conclusions? certainly there were other spans where the 50d and 200d ma's of those percentages of companies were similar. That would bring greater strength to your opinion of the market moves of the near future. I dunno, jus sayn.. Orrr just put it all on 13 Black!

Ayelet Wolf 4 weeks ago Member's comment

For a dim bulb, you make a lot of sense ;-)

George Lipton 4 weeks ago Member's comment

You make some excellent points Richie.