Can The Bulls Make A Stand Near Support? [Dow Jones Industrial Average, SPDR S&P 500 ETF Trust]

If we also consider relatively strong economic data, it tells us to keep an open mind about the next move in equities. Even if the bears get their hoped-for significant correction or bear market, tops can form over time. For example, it took the Dow nearly three months to peak in 2011 (see chart below). A sign of weakness emerged when the slope of the 50-day rolled over in early June 2011 (see orange arrow on left). After a scare, the Dow staged a significant bounce-back rally all the way to point A; a similar rally remains a possibility in 2014.

Odds Of A Recession?

How does the bigger picture look today? It is a mixed bag. From a negative perspective, the 50-day is starting to roll over (see orange arrow below). From a positive perspective, the Dow is still holding above its 200-day moving average, telling us many blue-chips remain relatively healthy from a longer-term perspective. Another positive is the health of the U.S. economy. Bear markets are typically associated with recessions. The U.S. economy does not appear to be at high risk of an imminent recession (based on the data we have in hand).

Investment Implications – The Weight Of The Evidence

On August 6, we listed 1911 on the S&P 500 as a bull/bear guidepost. On August 7, the S&P 500 closed at 1910 and change. How does that help us? We used it as a reference point and trigger to see if our current allocation was in line with the market’s current profile. In our case, the answer was “our cash and bond positions remain sufficient to offset the risk of further downside in our equity holdings (SPY)”. Therefore, by rule, we made no changes Thursday. However, market weakness on August 7 did nothing in terms of making the market “prove it to us”. If stocks cannot post gains Friday, the odds are good we will reduce equity exposure for the fifth time since July 24. If stocks can rally Friday and hold key support shown above, we will be more apt to maintain our current exposure to stocks. It should be noted that making no moves on August 7 does not mean everything is rosy for stocks. To the contrary, the market’s profile is currently so concerning that we have already cut risk significantly, with the first defensive step coming back on July 25. We will enter Friday’s session respecting both the “highly vulnerable to even a plunge scenario” and “potential support is in the neighborhood” scenario.

This article is brought to you courtesy of Chris Ciovacco from Ciovacco Capital.

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