Last week Chris Ciovacco of Ciovacco Capital Management posted a video with his always thorough analysis considering whether this was the last hurrah before a major bear market or the final test of support before the market resumed its uptrend. He entitled it “Trend Exhaustion or Eminent Plunge” . At around the 5:35 point, that video explains the Demark Studies “9-13” setup for a reversal and how it plays into this week’s analysis. “9-13” signals on the downside are relatively rare but we got one in May. So, we need to keep an open mind to the possibility of a reversal to the upside. Even though from a sentiment perspective or even a fundamental perspective it is very difficult to see how any good can be in the pipeline.
“Final Stock Market Capitulation Or False Move Before 2008-Like Plunge? “
In this week’s analysis Chris looks at the questions, “Have we seen full-capitulation?” or “Is this the last gasp before a 2008 like plunge?”
By “full-capitulation” he means, has the downtrend exhausted itself and is now ready to reverse to the upside9-13, Capitulation, Plunge, Reversal
? And he examines some of the factors that would have to be in place in order for the market to begin moving upward again. One of the Key factors would be what he calls a “FED pivot” i.e. a change in FED policy from tightening to, if not loosening to at least being less tight.
While I think that would be a mistake for the inflation situation, the current FED has been late to react to inflation pressures and hasn’t shown the backbone necessary to fight inflation, so it is quite possible that they will jump at any excuse to slack off on their tightening and cave to market pressure. So, they might reverse course at the slightest hint that inflation could possibly… maybe… be moderating… a little… perhaps.
If the FED continues with this weak willed “leadership” and takes a bit more dovish stance it is possible that the market will rally. Then rather than knocking inflation out, it is possible that the weak FED action will result in inflation holding at current levels rather than returning to the FED’s “target” of 2%.
Chris highlights a couple of headlines hinting that Reuters and Bloomberg are priming the populace with excuses so the FED has a reason to slack off.
He also highlights three cases similar to the current situation where all the pieces were in place for a reversal, but in those cases there was still a bit more pain involved. But we still need a few factors in order to confirm a reversal to the upside. They are “Price”, “Momentum”, and “Trends”. In the current situation we are not yet into the “oversold” territory of previous reversals.
“If the Dow were to correct down to the level that the NASDAQ has already dropped that is still another 18.39% below current levels.”
According to the Weekly Demark Chart for the S&P 500, it has a hypothetical upside of 23.22% and a hypothetical downside target of -12.12%. The recent rally is the easy part there is still some strong hurdles to overcome. Even if the S&P rallies back to 4300 there is still a lot of resistance to contend with. Things will look a lot better if the S&P can rally to 4800.
Tech and Growth vs. Value
It is possible that the COVID lockdown caused Tech and Growth stocks to get overextended and the current correction is simply removing some of that excess from that sector of the market, resulting in the NASDAQ being the hardest hit. At this point, Value stocks are performing much better than tech.
It is equally possible that in the early stages of the correction market professionals are simply practicing a flight to safety.
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