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Make or Break Time for the S&P

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I have been a long term bull for the S&P, but I admit that I was overly optimistic in the market leading up to the latest decline. In hindsight it is clearer to see we were pretty overbought and the RSI shows massive divergence. As a result we have had a nearly 20% drop from ATH's as investors panic sold their positions. The question is, have we reached capitulation yet or do the bears have a much tighter grip on the market right now?

My outlook is still positive for a number of reasons. On a purely technical point, we have yet to pierce through the yellow trend line which dates back as far as 2009. during this period the 200 week MA has supported us twice during a correction, most notably during 2016. As long as we can hold above these two indicators, by probability we should start to reverse at these levels. As it stands now, this could be anywhere between 2350-2300. The weekly RSI is now entering oversold conditions, so a bounce is likely due soon. However, caution is fully advised because The RSI can rise whilst the price still drops. This is something I am actually expecting to happen, as we could easily dead cat bounce from around 2400 and drop back down to the target range of 2350-2300 in the next couple of weeks. This will likely give us some divergence, and it is from there that I am looking for a reversal point.

When we look back at the last 2 major crashes of the past 2 decades, they can be accounted for major market events that provided a strong fundamental explanation. The 2000 tech bubble is fully understood to be created from speculative investing in equities that had no viable future or business structure (much like what the crypto space is going through right now). Out of this were born the viable tech-based internet companies such as Google, Amazon, Apple etc. We were all set for recovery in the market as we reached ATH's again in late 2007, until the financial crisis of 2008 hit us. This can of course be explained with the housing market in relation to credit default swaps and lack of legal framework around it. Currently, I am yet (maybe naively) to see something of this caliber manifesting itself in the market. That's not to say that something won't come up like this in the future, I just don't see it quite yet.

Lastly, the economy is fairly stable with employment rates staying at a decent level. Emerging industries from the tech sector are continuing to develop, evolve and create new products and opportunities. This is something I see speeding up rather than slowing down any time soon. Of course they're are problems that will follow, but this has always been how the economy functions. We have an innate way of adapting to an ever changing environment. Poverty continues to reach all time lows, with 3rd world countries quickly developing into the modern age. We have a long we to go, but currently the trajectory seems to be upwards.

The doom and gloom isn't there yet in my eyes, I believe this market still has strength in it. It can look like we have had a crazy run up in the last decade, but this has been replicated several times before. Just look back and you can see the S&P making similar gains on a percentage basis within the same time periods. Hopefully the good times aren't quite over yet folks!

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This market crash known as 'Black Monday' is similar to what I see now. No real explanation apart from fear and panic. Notice how we bounced perfectly of the 200 week MA and the Trend line.

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Same Idea for the DJI. Trend line not as clean but best fit. Lines up nicely with the 200 Week MA:

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NASDAQ has potential for a bigger drop. However, it could reverse of the 200 week MA, and touch the trend line at a later date. as it stands the S&P appears closer to determining the direction it will go next year.

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Looking good on the bounce from the 200 week MA, if we finish anywhere above 2420 tomorrow then we will end the week strong. This will give us more of a chance for continuation next week. I'm looking for this bounce to reach around 2550-2600 before having a pullback. But if we can make a lower high on the weekly time frame I will be more confident that this reversal is legit.

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So it looks like the 200 week MA has provided support of the price action at this time. I managed to time this pretty well and have been Long since around 2360. I have sold half of my position for now because the daily candlestick (I will link the chart below) finished on a bearish spinning top which could signal a reversal back down. However, the weekly candle shows promise with what almost looks like a bullish piercing reversal.

Ultimately I am still looking for a reversal in the market. But for now I am going to trade carefully before adding to a longer term position. I am fairly confident that we can reach 2600 before coming into major resistance, which is previous support levels coupled with 100 week MA. So I will wait to sell the other half of my position at 2580 before reaching this point. I expect to get rejected, and from there I can evaluate when and if I choose to enter another long position.

My approach will now be to anticipate a higher low to start forming on the weekly time frame. If that fails then I'm hoping the trend line can support us enough to rebound the price. That being said, I would not be surprised to see another leg down below the trend line before reversing. If I can see clear divergence on the RSI at this point then I would also consider entering a Long position.

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