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Corrective phase still needs more time

Ron Meisels & Dave Tippin,  Phases & Cycles, Montreal, QC, Canada www.phasescycles.com

“The S&P 500’s corrective move is unfolding with few surprises.  After the massive June/July rally, the growing gap between the Index and its 200-day Moving Average needed to be narrowed, and it was. We expected volatility to increase and this has occurred. The recent type of sharp downside moves, often coinciding with perceived “negative” news (yield curve, recession, trade wars etc), is normal in a bull market.  Other major market indices have moved down as well.  New York is experiencing a broadbased pullback within its ongoing bull market.

In the past few weeks the S&P 500 has carved out a “down-up-down, A-B-C” price pattern that has seen a re-test of support in the low 2,800s.  This area has been an important zone of overhead resistance and then support during the last year.  Some other major market indices in New York have also re-tested their early August lows.  Supporting indicators such as the NYSE daily advance/decline line are also behaving more positively, small positive divergences in internal momentum are appearing, some short

term indicators are reaching oversold levels, and selling “climax” type action was seen on August 5 and 14.  Market sentiment continues to be “worried and fretful”, the AAII individual investor optimism reached a new low for the year in early August (only 21.7% bullish).  All of these factors are encouraging for the bulls, and can be viewed as signs that the correction may be nearing an end.

Despite these positives, our view nevertheless remains that this correction is not going to be a “quickie.” There are three reasons for this. First, the 39-week cycle is not due to mature until the end of September.  Second, the historical pattern for pre-election years is that the S&P 500 frequently has a prolonged period of weakness in the summer/autumn period. And third, back-to-back corrections usually do not repeat themselves in exactly the same way. The S&P 500’s previous correction in May (a sharp 7.7% pullback) took the form of a straightforward “A-B-C” price pattern. Therefore, we should expect a somewhat different price pattern this time, probably one that takes a more complicated path to completion.  A correction along the lines of the more drawn-out, back and forth pullback Toronto is currently experiencing could be New York’s path.

The S&P 500 has corrected about two-thirds of its June/July advance and remains above its 200-day Moving Average.  One possible scenario for the next few weeks is that the S&P 500 moves mostly in a trading range bounded by its 200-day Moving Average (2,800) and its 50-day Moving Average (about 2,950). Volatility will continue and the trading range will be briefly broken both to the upside and downside. The final phase of the correction may see a more extended downside probe below 2,800 – to get the bears really excited and confident – and then a bullish reversal to the upside.

We remain in the Yogi Berra camp for the moment – “it’s not over till it’s over.”  The correction likely needs more time to fully exhaust the selling pressure. The autumn season should see a very clear upside breakout and a resumption of the bull market with a new up leg.” (22-Aug-19)

Copyright 2019 by Stockcube Research Ltd.