Today’s stock market is a battleground for an epic, unending war between two opposing forces – the bulls and the bears.
And much like war strategists, market analysts have an arsenal of tools we use to determine which side is winning… and how to adjust our strategies and tactics accordingly.
Take a look at this chart of the S&P 500 (SPY). I’ve drawn a horizontal line at the $200 level, because that is where prices found support in late 2014 and the beginning of this year. Note: the $200 level on SPY is equivalent to the 2,000 level on the S&P 500 index.
Each time prices fell to that level earlier this year, buyers swooped in to buy stocks, eventually pushing prices higher.
Essentially, the bulls were winning the “Battle for $200.”
Fast-forward to August and you’ll see the $200 support level was broken. That time around, instead of stepping in to buy shares at $200, bullish investors were nowhere to be found. They had retreated to their camps, regrouping and licking their wounds.
This was a clear signal that now the bears are winning the fight.
But this war story doesn’t end there. Because market analysts, like myself, know that the bulls and the bears tend to fight multiple battles over familiar territories. And we have a saying for this tendency, which goes:
“Support, once broken, becomes resistance.”
Think about it…
If an enemy army succeeded at conquering your camp, aren’t you going to fight to take it back the next time around?
That’s essentially what bullish investors will need to do if they want to win the war – they need to reclaim control of the $200 level. But so far, they haven’t shown the strength needed to accomplish that.
Take another look at the $200 level in the chart above, which I labeled “Resistance” following the August 21 sell-off.
As you can see, bullish investors spent the beginning of September pushing prices back up to that level – eager to make another run at bearish investors, who had taken control of the $200 mark weeks before.
Interestingly, that most recent “Battle for $200” coincided with the Fed’s September 17 meeting and press conference. And this made the fight all the more important.
Initially, the bulls showed strength on the morning of the 17th. And they succeeded in pushing prices as high as $203 for a brief time. But the tide turned quickly following the Fed’s 2pm announcement.
After that, the bears flexed their muscles and wrangled control from the bulls. By the end of the day, the bears had pushed the S&P 500 to its lows and reclaimed control of the $200 level.
I share this “war story” with you today because it’s unfolding in a fashion that’s quite similar to a battle fought in 2011. Here’s what the S&P 500 looked like then:
Back then, it was the $125 level that bulls and bears were fighting over. But the tug-o-war rhythm of the battle was much the same as the one I’m seeing play out today. And that means we should prepare for another wave of bearish selling – likely pushing the S&P 500 back down to its August 24 lows, around $185.
I say that because the 2011 correction extended beyond the initial early-August sell-off. After a weak bounce higher into early September, stocks suffered another wave of selling into early October.
And I expect to see the same pattern unfold today, with the S&P 500 (SPY) falling back down to $185 in the near future.
Of course, in 2011, the correction resolved and stocks traded higher between 2012 and 2014. But there’s no guarantee that will happen again this time. It’s simply too early to tell.
So be warned… this war is far from over, but, for now, the bears are clearly in control!
Chief Investment Strategist, Dent Research