This is the monthly chart of the
SPY
the ETF that follows the S&P 500. Above the price chart is the Twiggs Money Flow indicator. Note the significant bearish divergence, evidenced by a decreasing trendline on the indicator while the price trends upwards. While bearish divergence alone does not always lead to a trend change, for the last few years, with the exception of a the euphoric "blow-off top" we experienced just before the "Vixplsion" in early 2017, each time that money flow indicator interacts with this downward trendline, we get a significant pullback (7-15%) wtihin the next few months. While the month of December is only half way over, we can already see a clear pattern of decreased trade volume as price rises for the last few years. The only time we have seen above-average volume on the monthly charts recently is during these significant pullbacks when money flow gets overbought (as well as the volatility following Trump being elected president). This has been the new normal for this "melt-up" bull market. The trend remains bullish, but the higher we float on below-average volume, the harder it is to recover from these periodic pullbacks. While calling the top is never a wise strategy, it is important to be aware of the risk vs reward before entering any trade. As we can see from the Fibonacci extension on the chart, we closed above the 1.618 extension line last month of a trend that began after the housing bubble burst. This is a significant achievement, and if we can prevent from closing below November '19 lows, expect SPY 360 to be achievable within the next 2 years. That's an upside of between 10-12%, which is right around the long-term average (5-6% gains per year).
However, if we see another significant pullback (below 275 or so) and SPY is unable to close the following month back above the 1.618 extension (around 305), the melt-up is likely finished. We do have the monthly 50 SMA as a potential bounce point, and I could imagine a scenario where we test that moving average and recover swiftly, similar to what we saw last December...however, V-corrections are rare events, and they generally require outside assistance, such as improving fundamentals or further liquidity being added by the central bank. If we continue to see fundamental softness, such as shrinking corporate earnings, added uncertainties in politics or trade, or (gasp) lack-luster consumer spending, it won't take long for this market to correct. I expect when all is said and done, we get a pullback of 30% or even 50% the very top. The risk vs reward is skewing to the short side in the medium term (2-5 years). The key to trading this market will be to wait for either a lower high to develop before switching to a short-biased strategy, OR hedge long-sided trades when we show signs of exhaustion such as we see now. then take sufficient profits off the table after the first deep cut, providing a "free hedge" on the remainder in case the bull market does not recover. This has been my strategy, and it worked well last year, but hasn't paid in 2019...we shall see if this changes in 2020.
SPY
the ETF that follows the S&P 500. Above the price chart is the Twiggs Money Flow indicator. Note the significant bearish divergence, evidenced by a decreasing trendline on the indicator while the price trends upwards. While bearish divergence alone does not always lead to a trend change, for the last few years, with the exception of a the euphoric "blow-off top" we experienced just before the "Vixplsion" in early 2017, each time that money flow indicator interacts with this downward trendline, we get a significant pullback (7-15%) wtihin the next few months. While the month of December is only half way over, we can already see a clear pattern of decreased trade volume as price rises for the last few years. The only time we have seen above-average volume on the monthly charts recently is during these significant pullbacks when money flow gets overbought (as well as the volatility following Trump being elected president). This has been the new normal for this "melt-up" bull market. The trend remains bullish, but the higher we float on below-average volume, the harder it is to recover from these periodic pullbacks. While calling the top is never a wise strategy, it is important to be aware of the risk vs reward before entering any trade. As we can see from the Fibonacci extension on the chart, we closed above the 1.618 extension line last month of a trend that began after the housing bubble burst. This is a significant achievement, and if we can prevent from closing below November '19 lows, expect SPY 360 to be achievable within the next 2 years. That's an upside of between 10-12%, which is right around the long-term average (5-6% gains per year). However, if we see another significant pullback (below 275 or so) and SPY is unable to close the following month back above the 1.618 extension (around 305), the melt-up is likely finished. We do have the monthly 50 SMA as a potential bounce point, and I could imagine a scenario where we test that moving average and recover swiftly, similar to what we saw last December...however, V-corrections are rare events, and they generally require outside assistance, such as improving fundamentals or further liquidity being added by the central bank. If we continue to see fundamental softness, such as shrinking corporate earnings, added uncertainties in politics or trade, or (gasp) lack-luster consumer spending, it won't take long for this market to correct. I expect when all is said and done, we get a pullback of 30% or even 50% the very top. The risk vs reward is skewing to the short side in the medium term (2-5 years). The key to trading this market will be to wait for either a lower high to develop before switching to a short-biased strategy, OR hedge long-sided trades when we show signs of exhaustion such as we see now. then take sufficient profits off the table after the first deep cut, providing a "free hedge" on the remainder in case the bull market does not recover. This has been my strategy, and it worked well last year, but hasn't paid in 2019...we shall see if this changes in 2020.