Bullish Setups

ODDS MORE FAVORABLE FOR BREAKOUT ATTEMPT

The term setup speaks to probabilities.  There are several positive setups on the chart of the Vanguard Total Stock Market ETF below, telling us patience over the past 124 calendar days may be on the verge of being rewarded with higher highs and higher profits. 

The annotations are described in more detail below:

From a price perspective, VTI traded inside the orange box for 124 calendar days; it is currently attempting to break above the box.

When black ADX drops to low levels and sits below both red and green, it indicates a trendless, sleepy market.  When ADX black starts to rise from below both red and green, it can indicate the start of a new trend.  The setup is in place; now ADX black needs to complete the turn, which falls into the TDB category.

According to stockcharts.com, "As a coincident indicator, CCI surges above +100 reflect strong price action that can signal the start of an uptrend... the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move."

A May 7 Short Takes post highlighted "bearish momentum failures" that told us to be open to a push higher in stocks.  Similar bearish momentum failures are present in Wm %R on the VTI chart above.  According to StockCharts.com, "The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move."  In short, the bears have been unable to establish much downside momentum over the past eight weeks, which is in stark contrast to the previous eight weeks. 

RSI also shows waning bearish momentum via a series of higher lows.  According to stockcharts.com, "RSI tends to fluctuate between 40 and 90 in an uptrend with the 40-50 zones acting as support."  Thus, bullish odds improve when RSI can recapture the 40-50 range and hold above the 40-50 range, which is exactly what has transpired over the past four weeks.

MORAL OF THE STORY

The terms odds and probabilities are significantly different from the terms certainty and forecast.  The chart and indicators above tell us it is possible we are moving from a harder market to what could be an easier market.

Since we have held our winning positions during the recent correction, the developments outlined above do not change much from a game-planning perspective, other than it may be prudent to invest small pockets of cash, which also falls into the TBD category. 

SEE IT MARKET POST

If time allows, we may try to post a few more setup charts via a second post on See It Market. 

This Bullish Signal Never Occurred During The 2000-02 And 2007-09 Bear Markets

2000-02 BEAR MARKET

In late 1999, several months before the S&P 500 peaked, monthly RSI dropped below 70, which was a sign of waning momentum.  Monthly RSI never recaptured 70 during the entire 2000-02 bear market. 

2007-09 BEAR MARKET

After the S&P 500 peaked in October 2007, monthly RSI never recaptured 70, which was a sign of waning bullish momentum.  Monthly RSI remained below 70 for the entire 2007-09 bear market. 

MAY 2018:  MONTHLY RSI RECAPTURES 70

Unlike the 2000-02 and 2007-09 periods shown above, monthly RSI closed back above 70 on May 31, 2018 and remains above 70 today.

"OVERBOUGHT" IS NOT BEARISH

As shown via the 1994-98 example below, during strong trends markets can remain "overbought" for long periods of time.  We have highlighted similarities between 2016-18 and 1994-96 numerous times, including in December 2016.  A March 2017 analysis provides numerous examples of bullish periods that were marked by "overbought" readings. 

ANOTHER "THIS NEVER OCCURRED" SIGHTING ON THE NASDAQ'S MONTHLY CHART

This week's video covers a separate important development that went into the books at the end of May 2018.  The video also provides a detailed comparison between 2018 and the  period in late 2015/early 2016 that featured a false breakout, reversal, and lower low. 

MORAL OF THE STORY

The charts assist us in assessing the probability of good things happening relative to the probability of bad things happening.  Given what we know today, the probability of good things happening is quite a bit more favorable than it was in early 2000 and late 2007

Are Stocks Set Up For A 2015-2016-Like Bearish Reversal And Lower Lows?

PLUS: THE MESSAGE FROM THE NASDAQ'S MONTHLY CHART

Will Italy Take Down The Bull?

THE MARKET'S NEW HOT TOPIC

Markets tend to move from one hot topic to the next.  The latest concern stems from political uncertainty in Italy.   Any time stocks drop over 1%, it is unsettling.  Therefore, it can be helpful to put recent volatility in some historical context.

WILD SWINGS ARE NOT ABNORMAL

In 2011, markets were nervous about Europe, as noted in the Time magazine headline below dated September 29, 2011.

As concerns about Europe increased in 2011, stocks plunged in August and then remained in a wide, violent, and frustrating period of consolidation for several months.

In the period shown above, stocks were red on 60 trading days;  33 trading days featured a loss of 1% or greater.  There were no shortage of emotional swings for those watching the markets tick-by-tick in 2011. The thick and long red candlesticks above indicate strong selling pressure. 

AFTER THE PERIOD OF CONSOLIDATION

Is it possible for stocks to plunge, consolidate for several months, have numerous gut-wrenching 1% down days, and then go on to make higher highs?  As shown via the chart below, the answer is yes, it is possible.  From the plunge low in 2011, the S&P 500 eventually righted itself and went on to post very satisfying gains for patient investors.

2018:  A Plunge FOLLOWED By Consolidation

The purpose here is not to say that 2018 is exactly like 2011, nor is the purpose to forecast bullish outcomes in 2018.  The purpose is to illustrate that a sharp plunge, followed by a consolidation period featuring volatile swings and numerous 1%-down days is far from unprecedented, nor abnormal in the financial markets. 

COMPARISONS TO 2000 AND 2008

This week's video makes longer-term comparisons to the major bull market peaks in 2000 and 2008.  The charts help us better understand the probability of good things happening relative to the probability of bad things happening.  

THE ISSUE IN 2011 WAS EUROPE, NOT THE U.S. DEBT DOWNGRADE

A logical question might be, but what about the downgrade to U.S. debt in 2011?  If investors were overly concerned about a U.S. debt default in 2011, they would not have been buying long-term U.S. Treasury bonds (TLT).  TLT did quite well during the period shown below, telling us the primary issue was Europe.