TALKING TECHNICALS

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

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