Market Outlook

 One down week and talks of market collapse have already started. My advice, relax a little, settle down.

Don’t misunderstand, the market has gotten more expensive, corporate earnings for the second quarter were horrible, Fed may taper, and we have political wrangling over the debt ceiling to look forward to in a couple weeks. And maybe a new Fed Chairman (woman).

But we have had issues all year, and the market has marched upward in a nice orderly fashion. What has driven the market so far hasn’t changed. And that is blind faith in the prospect for accelerated growth from Europe, China, and the U. S. in the third and fourth quarter of this year. At this point that thesis has to be disproved to precipitate a significant correction or even a crash.

I know some readers aren’t fans of my graphs, but I am a “picture is worth 1000 words” kind of guy, so below is what I’m following to hopefully avoid making any rash decisions.

This is a chart of SPY – an exchange traded fund that essentially duplicates the S&P 500, commonly referred to in the press as “the market”. This goes back to May of last year.


What I’m looking at is that SPY has gone up over this time period, but of course not in a straight line.

From Sept through November of 2012 and May through June this year the market has trended down. But the important point is that SPY’s price stayed above the bottom white line. And when SPY was heading up it stayed at or below the top white line. This is what we call a channel. Spy has stayed within this channel for about 16 months now.

At the end of the graph I’ve put in arrows for a potential path for SPY. This is not so much of a prediction as a guide. At this point we have every expectation that SPY will drop in price for the next couple weeks, around to the $160 level (equivalent to 1600 for the S&P 500) as indicated by the red arrows. Then it will hopefully “bounce” off the lower white line and head up again as shown by the green arrows.

Again, this isn’t a prediction, but a guide. As long as SPY stays within this range, we aren’t predicting anything dire. However, if SPY were to break below the lower white line, breaking its 16 month pattern, we would get concerned. All patterns eventually come to an end. But if all goes as Wall St. expects, then that breaking trend will be to the upside – breaking above the top white line.

Bottom line

A 5% – 6% drop from here would be consistent with what the market has been doing for 16 months, and no cause for worry. And way too small of a “correction” to try and trade on. But historically this is a very narrow range and we do expect a breakout soon. Yes, I think September and October could be rough months. Importantly our strategy is in place if the market does break to the downside. But this has been a very resilient market, and I would also recommend against being too cautious too soon.

The question to ask, is do you have a preplanned strategy to follow if the market does enter into a serious correction? Not having a plan leads to knee jerk reactions and is poor policy. If you need help mapping out your plan, please give us a call so we can help chart your course.

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.


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