TALK­ING TECHNICALS

Risks are ris­ing, and the re­cent gains on the S&P 500 sug­gest a bear mar­ket rally

Financial Mail - Investors Monthly - - Contents -

The sharp sell-off at the end of 2018 re­sulted in the S&P 500 trad­ing be­low its 50-week mov­ing av­er­age (MA) for the first time since 2015.

This is sig­nif­i­cant as the 50week MA has been a re­li­able in­di­ca­tor of bull and bear mar­kets. The long-term chart il­lus­trated here goes back to 1998. Over that pe­riod, there have been six turn­ing points from bull to bear mar­kets and vice versa. The think­ing is that a bull mar­ket is in­di­cated by an up­ward slop­ing 50-week MA and a bear mar­ket by a down­ward slop­ing 50-week MA.

You can see that the 50week MA turned lower at the peak of the bull mar­kets in 2000 and 2007. Sim­i­larly, the 50-week MA turned pos­i­tive in 2003 and 2009 to in­di­cate the start of new bull mar­kets that ran for sev­eral years.

In 2015 there was a brief blip where the 50-week MA turned neg­a­tive, but that didn’t last long af­ter the US Fed­eral Re­serve an­nounced the con­tin­u­a­tion of ag­gres­sive stim­u­lus mea­sures for the US econ­omy.

The 20% sell-off wit­nessed on the S&P 500 at the end of 2018 was suf­fi­cient to drag the 50-week MA down to now point lower. What has typ­i­cally hap­pened at the start of prior bear mar­kets is the mar­ket has bro­ken down be­low the 50week MA, then re­bounded sharply to test the un­der­side of the 50-week MA be­fore fall­ing away again. That was the case in 2001, 2008 and 2015. At the start of 2019 the S&P 500 has had a ma­jor rally off the lows. It has gained 15% off the lows in a straight line. Such rapid ral­lies are more of­ten seen dur­ing bear­ish mar­ket cli­mates or at the start of a new bull mar­ket af­ter a crash. The fun­da­men­tals sug­gest that the this is a bear mar­ket rally. The US eco­nomic cy­cle is ma­ture and risks are ris­ing. If the S&P 500 fails at the un­der­side of the 50-week MA at around 2,740 in the com­ing weeks, it may be an omi­nous sign that re­sults in an­other leg lower in com­ing months. Ex­pect con­tin­ued volatil­ity.

Since 2013 the price of gold has grad­u­ally been form­ing a large base with a round­ing bot­tom pat­tern ev­i­dent. It has been a painfully slow move for gold bulls, but it does look as if the price is be­gin­ning to show prom­ise.

Af­ter bot­tom­ing in late 2015, gold has been form­ing higher lows on the many pull­backs that have hap­pened dur­ing that time. At the up­per end, there is sig­nif­i­cant over­head re­sis­tance at $1,375 per ounce. That re­sis­tance is formed by a se­ries of prior tops since 2013.

It looks likely that the $1,375 level could be tar­geted again dur­ing 2019, po­ten­tially af­ter a bit of a breather. It will then be crunch time when it gets to $1,375 to see whether the gold bulls have the power to push the price through that re­sis­tance. If a con­vinc­ing break

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