When the Levee Breaks
2022.12.18 05:42
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Bear market rallies tend to give people hope, only to dash those hopes with the next move lower. It can be emotionally and financially draining. The recent advance off the October lows showed none of the signs that would suggest a longer-term bottom. So, a reversal at the 200-day moving average was likely given how it has historically tended to be a strong bear market resistance area.
Last month, I laid out three technical factors that I was watching that would suggest the end of the rally. As of today, all three of those have occurred.
Below is the same chart that I posted in that newsletter. In the top panel is a chart of the and in the lower panel is the MACD (a momentum indicator). Here are the three factors:
- A break in the uptrend line.
- A break of support.
- The MACD rolling over.
All three have occurred which signals that the odds of more losses in stocks have risen significantly.
I have no way of knowing how far stocks are going to fall. But what I do know is that we are in a bear market with a recession likely next year. Thus downside risk is huge.
Uptrend lines and support areas can provide traders with logical exit points. Meaning they will hold long positions until those lines get broken. It is common to see strong moves lower when those lines/areas get broken as traders exit positions in mass. Once the levee of support breaks, the price has nowhere to go but down.
As Robert Plant sang: “When the levee breaks, have no place to stay.”
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