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Why last week’s drop didn’t change anything

Posted by Dan on January 11, 2016

Stock markets went into a steep slide last week, producing one of the worst starts to a new year ever. I wrote last week that the shorter term indications tend to pan out first, and that’s what we are getting. This gives us a new situation in the Nasdaq chart (click image to enlarge it):


The drop has cut through several support levels in the Nasdaq, and the next one is just below 4600, the late September lows, as well as the support zone that held the market in early 2015. Whether stocks will go that low remains to be seen. A failure to test the 4550-4600 zone would actually be a bullish sign.
Technically all my indicators are now heading for major lows, but showing no signs of bottoming out just yet. It may take another week before they start turning up again, so there is good reason to remain patient and wait for signs of stabilization. Sometimes selling begets more selling and creates a chain reaction. That possibility is definitely on the table at this point.
It looks like the market is going with the LT wave for January, which points to ongoing weakness until around the 19th. We will also start a new lunar red period later this week. So, I would stay patient and wait for clearer signs of a bottom. Even though we are likely to get some strong up days this week, they always come after a slide like this, another dip or a retest for a double bottom is a strong possibility in the third of week of this month.

The terrible start of the year revives talk about a market crash or a recession in 2016. But this drop didn’t really change anything for people who keep a birds eye view on the market. The most simple approach to investing doesn’t use any indicators and just goes along with what can be seen on a long term chart. If a stock or index keeps setting new highs regularly and just shows an ongoing pattern of higher highs and higher lows on a weekly chart then it is a bull market. Conversely if it keeps dropping to lower lows followed by lower highs it is a bear market (see Oil for a perfect example). Simple enough. There is a third “in between” state when we can question the state of the market. E.g. when we have a lower high and a higher low, then we don’t know if the market is bullish or bearish.
If we look at a weekly chart for S&P 500, the “regime changes” are easy to spot (click image to enlarge it):

S&P 500 weekly

From 2012 until well into 2014 it was a classic bull market, just higher highs and higher lows persistently. To be considered a lower low I always look for a low that is below the most recent visible low that came at least two to three months before. I want the low to stand out from the chart. So, just being down for three or four weeks does not make for a good lower low on this time scale.
The ebola panic in Sep-Oct 2014 gave us a clear lower low for the first time in years, but it wasn’t followed up by a lower high, so the bull market just continued with the market climbing to new highs.
Then we got the recent drop in August 2015. It was the biggest pullback in years, but it was not a lower low because it kept well above the previous significant low. We did get a nice lower high in November and that means we are now in “in between” state. If the market goes on to drop below the Aug 2015 lows, then we will have the regime change to a bear market. But if the market goes on to climb above the Nov 2015 high, then it is just an ongoing bull market. And that’s why last week’s drop didn’t really change anything. We have been in “in between” state for a while already and that situation remains unresolved until we get a breakout either way. A lot of people are of course forecasting that the market will crash. Trying to forecast what will happen can be fun, but it also can be costly. Some market “gurus” have never stopped forecasting the next crash since 2010. The followers who listened to them probably have no money left to trade by the time one of their forecasts inevitably comes true.
A 30% or more bear market historically happens about once every 10 years. But as my uncle used to say: “the best way to protect yourself against a crash is by participating in the bull market that comes before it.” If the market falls below last August lows, then it becomes a different ball game. Until then we just don’t know.

10 Responses to “Why last week’s drop didn’t change anything”

  1. AlanSW said

    Thanks, Danny. That’s an excellent, rational and non-sensationalist analysis of where we are now. It’s easy to get caught up in the hype, the noise, the ‘experts’ pushing an agenda or the media-savvy talking heads who know what to say to ensure they get their next pay cheque. Your calm analysis is a breath of fresh air and is much appreciated.



  2. Denis Roch said


    Is a weak stock market during lunar periods that are supposed to be strong an first sign of a potential major bear market or does this inversion occur frequently? Thanks.

    Cheers, Denis.

    • Danny said

      Hi Denis,

      The lunar cycles had an unusual long winning streak in 2015, which ended in August. Since late October all the lunar periods have gone against the normal tendency. See our cycle tracking page:
      Neither such a long win streak, nor such a long “inversion” is something that happens frequently.
      Because the lunar periods are currently failing in both directions we cannot make any conclusions for the long term market direction.
      When the lunar cycle kept winning in 2015 I wrote that the first failed period would probably be indicative for the direction of the next major move. And that’s what happened. A green period failed in early August and then we got a significant drop in the next weeks.

      Now we could have the reverse: the first lunar period that works normal again could show us the direction of the next major move. So, that’s what I am now waiting for, the first normal period after this series of inversions. We will then see what is on the table and I will mention it on the blog when we come to that point.


  3. Diederick Naude from South Africa said

    Hi Danny, I appreciate your work !
    I have been a silent observer for a while…..and trying to find the answers in planets even longer

    Thank you

  4. vick said

    i know sarcastically i can say i disagree; but your work is so Great and to the point i can not even dare to disagree
    you and your honest work and words are great and i can say that from work on APPle how to trade it and even while you lost money you did not hesitate to show and write that it is better to lose $10 dollars rather than your entire portfolio
    i must admire your honesty and many many thanks

    • Danny said

      Thanks for the chiming in, Vick.
      It is always safe to disagree with me. I don’t have all the answers, I don’t even have all the questions. Somebody who disagrees with my lunar cycles would have been right 6 times in a row now. That’s how it goes sometimes.

      I used the example of AAPL in my article because there is always more to learn from examples where the method didn’t too well. I could have chosen a stock that had been going up all year, like AMZN or GOOGL, and show how profitable the trades are. But that would be marketing rather than a useful example of how real trading with reversal levels will look like when the stocks we trade do not go our way.
      The problem with great marketing using the most profitable examples is that it creates unrealistic expectations, and that’s not a good starting point for a trader. I don’t want to do that to my readers.


  5. robert said

    The Russell 2000 and Dow Jones Transportation Index and a number of sectors have already breached the August lows. The stronger stocks of the DJIA, SP500 and NASDAQ 100 are always the last to breakdown in a bear market. I think we may be in a bear market. The DJIA is 10% off the 2015 high, The SP500 8+%. The NASDAQ 11%. We’ll see by the end of the 1st quarter.

    • Danny said

      Hi Robert,

      Good observations. It is not unusual for individual sectors or small cap stocks to be in a different state than the market as a whole ( as given by e.g. S&P 500). Gold and commodity sector have been in a bearish regime for years. Dow Transports has been trending down since late 2014.
      When some sectors are in decline the money may be finding its way in other sectors, pushing them higher. So, the overall market doesn’t necessarily change when a few sectors do poorly.
      If we look at charts for Russell 2000 or Dow Transports, it was not last week’s drop that made the charts bearish. They had been bearish for a while already. So, also in those cases last week’s drop didn’t change anything.

      The overall market may follow those weak sectors to the downside. A drop below August lows would confirm that. But it is also possible that the market finds its feet and comes out of it in the other direction. Has happened before, will happen again.
      In the bigger picture, nothing has changed until we get that breakout, up or down. Sooner or later we will find out.


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