How to Correctly Predict Stock Market Tops (Maybe...)

 | Apr 16, 2018 | 6:09 AM EDT
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One of the most frequently asked questions in my inbox these days is if I think the high is in for the year. The same way I have said time and again I won't know if the top is in until well after the fact, the same is true for if the high has been seen. While 'the high' is a point in time, tops are a process.

I can however tell you that as an update to the 200-day moving average line piece I wrote several weeks ago I think there are clues there. Let me note that in the year 2000, the high for the S&P 500 was made in late March (after Nasdaq and after the DJIA) The long term moving average line did not roll over until the fall of that year, well after the high was in.

In 2007 the high was made in October. The moving average line did not roll over until January 2008, just a few short months after. The reason was because we had already spent so much time up at the highs in 2007 so the October high was a minor higher high.

Therefore I will not know until after the fact if the highs have been seen. I can tell you that when I wrote that piece we were dropping prices from June of 2017 and now we are dropping prices from July where I have put a red arrow on the chart. For now prices from July are still about 200 points lower than where we are now. But note that there was a low in August that led to a very long uptrend that lasted until January. That means as we head into the summer months we will start dropping that upward ramp from last year.

Time is a big factor in this long-term moving average line. Price matters as well but the longer we spend in a price area the easier it is for the moving average line to catch up.

And moving average lines do matter. Just witness Friday's rejection at the still rolling over 50-day moving average line. Oh sure we're overbought, but overbought coupled with strong resistance clearly matters.

Yet what was curious about Friday's action was the VIX stayed red. The major indexes tumbled down in the afternoon and the VIX yawned. Breadth hung in there too. So once again we're still in the situation where the selling dries up on the downside and the buying dries up on the upside.

I would still like to see some downside action in the week ahead. Negative breadth numbers this week should set us up for another rally in late April as we would get oversold again.

I have observed that often when the first week of earnings sees negative reactions, such as we saw with the banks on Friday, the expectations for that to continue go up as we head into the second week of earnings and with expectations ratcheted down, the market tends to rally on any good news.

If the major indexes can stay over their February lows in the next week or so we should see those still declining 50-day moving average lines start to flatten out in late April. But I would reiterate that despite the drop in volatility on Friday I do not expect volatility will go away; I expect it to remain with us for some time to come.

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