Market When Closed, Sunday 17 November
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Is It The End, Friends?
by Alex King, CEO, Cestrian Capital Research, Inc
Friday saw a material change of direction in US equities. Pullback or structural rollover, we cannot know - if equities reverse back up and make new highs then it was just a pullback, if they fall, bounce, but not quite reaching new highs (as per March 2022) then we're probably on the downbound train. For now my view is we are en route to higher highs but that's not an absolute, and my conviction on that point is lower than it was this time last year when the market was weak.
Market tops, when they come along, tend not to be a spike high never to be revisited followed by a rapid collapse. They tend to look like they did in 2021, as the chart below (it's the S&P500 ETF, $SPY, but the Nasdaq and the Dow did something similar).
You can open a full page version of this chart, here.
A topping area proves impossible for buyers to overcome, because the volumes supplied for sale are too high. Buyers get the message and stop trying; the market drops. And then comes a bounce which moves back up, in this case, to a little higher than the .618 Fibonacci retracement of the move down, or in plainspeak, the bounce recovers about 60% of the first drop. This is a golden opportunity to sell if you missed the top. In fact the whole reason for the bounce is to help late sellers get out. Anyone buying here is just an unwitting provider of exit liquidity.
So, if the market has topped in this cycle I would expect to see a continued resistance zone that cannot be defeated, then a drop, then a partial retrace (remember, golden opportunity!) then the real drop.
We aren't there yet, and in bull markets I find it better to assume the bull is going to continue, until it doesn't. So what follows in our analysis below assumes that new highs are en route. Easy enough to recalibrate our take if in fact the market has topped. The methods we use here at Cestrian are truly market neutral - we aim to project where securities prices may move to next based solely on the prior price moves - this works whether the market is moving up or down. So personally I do not fear a bear market any more than I celebrate a bull market. A pattern is a pattern. Bull market? Long. Bear market? Short. Don't like short? Consider an inverse ETF. It's not so difficult. The only thing that can trip you up is your fixed world-view, if you still have one.
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