Warning: Expect A Big Move This Week…
The S&P 500 remained above its 200-day moving average (MA) last week. The index is now up about 19% in the past eight weeks.
At Friday’s close, the index was at an important resistance level. That’s the dashed blue line in the chart below. I expect a quick move of at least 5% over the next few weeks. The question is whether the move will be up or down.
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News should provide the catalyst for a price move. While we normally can’t predict when “news” will occur, we can safely assume there will be something about the approaching China trade war deadline.
On Sunday, CNBC noted…
U.S. and Chinese negotiators met for over seven hours on Saturday to resolve their trade dispute and avoid an escalation of the tit-for-tat tariffs that have already disrupted global commerce, slowed the world economy and roiled financial markets.
The two sides will meet again on Sunday morning as they race to seal an agreement before a March 1 deadline imposed by U.S. President Donald Trump, who has threatened to dramatically hike tariffs on Chinese goods unless there is a deal.
The deadline is the day after President Trump’s two-day summit with North Korean Premier Kim Jong-Un. Trump does like drama and he may have plans for a series of market moving announcements late in the week.
For now, there’s really no way to know what Friday will bring, and either outcome is possible. What does appear to be certain is that we’ll see some kind of large move.
History says a down move is likely. The next chart shows what happened the last time we saw an eight-week rally of more than 19% after a sharp selloff.
Another factor pointing toward a near-term pullback is the fact that the Dow Jones Industrial Average has closed up nine weeks in a row. I know I highlighted the length of the winning streak in the S&P 500 last week as well, but, according to Stein’s Law, “if something cannot go on forever, it will stop.” That tells me the winning streak in the Dow will stop soon.
#-ad_banner-#I’m switching my focus away from the S&P 500 because the Dow includes more history. Since 1900, the Dow has had a 21 separate nine-week (or longer) winning streaks. The longest streak lasted 14 weeks and occurred in 1965.
In the past, after a nine-week winning streak, the Dow closed up 61.9% of the time in the next week. The following week, the index closed down 66.7% of the time. (For those of you keeping track at home, that “following week” would line up with the week of March 4 in the current move.)
For comparison, the probability of an up week at any time is 55.3%.
By now, I have laid out enough statistics to make some investors’ heads spin, so I want to wrap up with a clear market call.
I believe it is likely that stocks will drift higher into Friday (March 1). Then, I expect a significant selloff with a test of the December lows coming in late March.
Of course, I’m a trader, and my opinion will change as the facts change. But based on all the information we currently have, I’m expecting the next 5% move in the major indexes to be to the downside.
I’m preparing my Profit Amplifier readers for this, and we’ll be in a good position to make outsized gains from the move. We’ve made a number of winning trades (both bullish and bearish) in the last few months, including gains of 10.4%, 58.9%, and 60% — all in a matter of days or weeks.
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