Last week was a very busy week! Frustratingly, it ended pretty much flat after the mother of all short covering rallies in the closing minutes of Friday’s trading session.
I say "frustratingly" because I held onto more growth-oriented positions until Friday waiting on a bounce. When it did not appear the bounce would occur at these levels (see March 2020 decline for reference), I decided I had better cut bait and sell out of many of them.
Not ideal timing, but I did add back a little of that exposure on Monday for a trade post the short covering rally.
So where do we go from here?
Over the weekend, I listened to advisors and managers make the case for the Fed to capitulate and markets to reverse higher all the way to the opposite extreme of the Fed is trying to crash the markets. I honestly can say there is no general consensus!
So, we turn to the charts, they can sometimes help when the markets appear confused and there is no clear path forward.
Above is a 4-hour chart of the S&P 500 Index. What you will notice on this chart is the market is bouncing but within what we call a Bear Flag (the area between the two dotted back lines).
What does a Bear Flag typically mean?
It usually is a continuation pattern that in this case could resolve itself lower.
If we took the recent all-time high of 4,818.62 and subtracted the recent low of 4,222.62, we get 596 S&P 500 points or roughly 600 if we round. If we then measure 600 points lower from the top of the Bear Flag pattern (estimated at 4,500), that gives us a rough target of 3,900 on the S&P 500 or another 13% lower.
Top to bottom this would give us a 19-20% correction. I think this is a real probability in the coming weeks.
Now the disclaimer – this is just a guess. Anything could happen from the Fed getting dovish to seven rate hikes, as Bank of America is now forecasting over the next two years.
I will say this, the next four months will likely be very volatile!
I expect there is a great deal of pressure on the Fed to deal with inflation, even if it ends up being transitory. This could mean they lean towards a larger number of rate increases and risk pushing the economy to the brink or into recession.
It will be a delicate balancing act; one the Fed usually gets wrong historically as you can see below!
So hold onto your hats, this one could get interesting!
Let us know if we can help.