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S&P 500 "Death Candle" Update



THE DEATH CANDLE PATTERN CONTINUES TO REPEAT ITSELF…FROM THE DEATH CANDLES…TO THE HOPE CANDLES…TO THE MERGING OF THE MOVING AVERAGES.
NEXT, IF THE MOVING AVERAGES DO FINALLY CROSS IN FEBRUARY, THEN WE MUST CONCLUDE THAT A DROP IN THE S&P 500, SIMILAR TO WHAT WE SAW IN 2001 AND 2008, WILL BE RIGHT AROUND THE CORNER.

Submitted by Craig Hemke, TFMetals Report:

As you know, the U.S. stock market just began the year with its worst January performance since 2008. Hmmm. And what happened later in 2008? To that end, we have been projecting an end to this current bull market in stocks since the August 2015 appearance of a “death candle” on the charts. Today, we provide an update.

It’s important to note that this forecast is not something we just stumbled into a couple of weeks ago. We first noticed the stock market rolling over in early August of last year and, at the conclusion of that month, we wrote this:

Next, we noticed that rallies of “hope” typically follow the appearance of the death candle so, on October 5 of last year, we wrote this:

But history told us that hope was fleeting so, on December 1, we wrote this:

And now here we are on February 1, 2016. The year began with a steep, global selloff in stocks but the past 10 days have seen global equity markets bounce back a little on a $5 bounce in crude oil and some overt currency manipulation by the Bank of Japan. So, is that it? Are equity investors “safe” as the markets resume their bullish trends? Well, please allow me to remind you of how we got here and the similarities to years gone by. After that, you can decide for yourself.

As we discussed in the Death Candle post, previous Death Candle months saw the following ranges and changes:

December 2000: Range was 9.72%. Final loss was 4.97%

January 2008: Range was 13.72%. Final loss was 6.38%

What did August of 2015 bring:

August 2015: Range was 11.64%. Final loss was 6.67%

Pretty startling similarities, wouldn’t you say?

We then projected an October-November rally based upon the Green Candles of Hope in 2001 and 2008. These previous Green Candle bounces produced the following gains:

Late December 2000 – January 2001: S&P rally from 1254 low to 1383 high. Total gain of 10.3%

March 2008 – May 2008: S&P rally from 1257 low to 1440 high. Total gain of 14.6%

And this latest Green Candle of Hope?

Late September 2015 – November 2015: S&P rally from 1872 low to 2099 high. Total gain of 12.1%.

As you can see, the market action in late 2015 was eerily similar to what foreshadowed the massive bear markets of 2001 and 2008. So, do the similarities continue? See for yourself.

After the Green Candle of Hope is early 2001, the market’s bubble finally burst as the month of February 2001 saw a total S&P range of 11.7% with a final monthly loss of 9.2%.

After the Green Candle of Hope in the spring of 2008, the market’s bubble finally burst as the month of June 2008 saw a total S&P range of 9.4% with a final monthly loss of 8.6%.

And what just transpired in January of 2016? After the Green Candles of Hope last autumn, did the market’s bubble finally burst? The total S&P range in January was 11.1% and the total monthly loss was 4.8%. However, without the startling announcement of negative interest rates by the BoJ on Friday…spiking the USDJPY and taking the S&P futures with it…the total loss for January would have been 7.1%.

<And, again, here’s where we need to insert our disclaimer as all of this comes with an important caveat. Though there was certainly some Central Bank market manipulation in 2001 and 2008, it was NOTHING compared to what we see today. Will cycles and history be too much for the CBs to overcome? Instead, will their almost daily interventions be able to stem the tide? We’re about to find out.>

So, the numbers continue to repeat themselves and the overall pattern certainly seems to “rhyme” with the bear market patterns of 2001 and 2008. But we’re talking about predicting the future here and pattern recognition alone isn’t going to get the job done. How will we know that the bull market has ended? How will we know that the final nails have been driven into the bulls’ collective coffin? Well, in that early December update, we offered you the chart below. Please take another good look now:

Please be sure to note the text in the bubble with the arrows. It states:

  • “The door slams shut when the 6-month moving average bearishly crosses the 24-month moving average”

We noticed that the final piece of the puzzle…the final “nail in the coffin”…from both 2001 and 2008 was this bearish cross of these two S&P moving average lines. After these lines crossed in January of 2001, the bear market began in earnest and the index fell nearly 600 points or more than 40% over the next 18 months. After these lines crossed in April of 2008, the bear market began in earnest and the index fell nearly 700 points or nearly 50% over the next 9 months.

Please take a close look at the chart below. The lines are very close to crossing again. In fact, had the Bank of Japan not sparked that 2% rally back on Friday, the lines would have crossed with the close of the month of January. Instead, the lines remain just one point apart.

THIS PATTERN CONTINUES TO REPEAT ITSELF…FROM THE DEATH CANDLES…TO THE HOPE CANDLES…TO THE MERGING OF THE MOVING AVERAGES. NEXT, IF THE MOVING AVERAGES DO FINALLY CROSS IN FEBRUARY, THEN WE MUST CONCLUDE THAT A DROP IN THE S&P 500, SIMILAR TO WHAT WE SAW IN 2001 AND 2008, WILL BE RIGHT AROUND THE CORNER. USING THOSE YEARS AS A GUIDE, A DROP OF 40-50% FROM CURRENT LEVELS YIELDS A TARGET OF 1050-1150 ON THE S&P, WITH THE LOWS OCCURRING SOMETIME OVER THE NEXT 12 MONTHS.

Again though, before you make any rash decisions, please be sure to fully consider these two points:

  1. Please scroll back up this page and re-read the disclaimer and caveat. The amount of direct central bank intervention in global equity markets has never before been this significant. Perhaps The Central Planners will keep the plates spinning with renewed QE and negative interest rates? Maybe. Again, something tells me that we’re about to find out.
  2. To that end, look at what just happened last Friday. The Bank of Japan unexpectedly announced a new, negative interest rate policy and this caused a huge decline in the Japanese yen. High Frequency Trading computers around the globe use as a key input the dollar-yen exchange rate as measured by the USDJPY. When these computers, which control over 80% of all U.S. equity trading, “saw” the rapidly rising USDJPY, they aggressively bought U.S. equity futures and drove the “stock market” more than 2% higher on the day. See the chart below:

At the end of the day, what you do with this information is entirely up to you. If you own stocks, ETFs and/or mutual funds in your regular accounts, IRAs and 401(k)s, it certainly appears that NOW is the time to be VERY cautious as history suggests that a major bear market in stocks is on our doorstep. Perhaps it would be prudent to take some time to review your current asset allocation and measure it against your risk tolerance and investment/retirement timeline. If another 50% drop in the “stock market” would decimate your accounts and ruin your retirement plans, it might be wise to consider taking some action before it’s too late. Hope in central planning and central banks cannot keep global equity markets afloat indefinitely. Our study of chart candles and market history suggests that the next central bank “policy failure” may be right around the corner.