As most of you know there are probably over 50 popular "Patterns" that investors use to forecast which direction the
market may be going. These patterns go back to over 50-70 years ago, when quantitative investors searched many past
years to identify certain patterns that seemed to (a) repeat themselves, and (b) have a high probability of an accurate
forecast going forward. Most of these were published in the news or on the Internet, and many investors follow them
with high confidence. A few of the most popular patterns are "double tops/double bottoms", "golden cross/death cross",
"MACD", "Moving Average Crossovers" , "Flags" , etc.
A lot of these were published many years ago and were confirmed by data back 20-50 years from that time. The problem
with this is that the market behavior in the past (50-70 years ago) has changed dramatically, so some of these are
completely obsolete. If so, then why do people still use them. My belief is that, if enough of "today's investors" believe that
these patterns will accurately predict what they claim, the buy/sell action from these "today's investors" will force the pattern
to behave as promoted. In other words, they perform as a "self-fulfilling prophecy".
Even if a self-fulfilling prophecy is the reason, we still need to pay attention to the results to help us understand what results
the current massive buying/selling in the market will cause.
So, where are we now (see the graph below, using Vanguard's VOO for the S&P 500/SPY):
- See the big "GAP" in the SPY between 2/21/29 (Friday close) and 2/24/2020 (Monday close)
- investors don't like an "empty" GAP, so it can act like very strong upside resistance now
- As you can see below, the SPY recently broke upward into the GAP territory, but failed to top it and dropped back down
- Most likely the market will try at least one more time to break above the GAP and head to a new All Time High (ATH)
- But, the ATH will probably behave as a strong resistance to the market climbing above it.
There is a strong possibility that, if the market does not break into "new high" territory in the next few weeks/months, and if the
economy does not show some attractive growth by then, this will basically lead to a real bear market (a drop of 25-50%) !!!
MIPS is still long, so let's wait for MIPS to tell what to do next...
- don't be afraid of a bear market, because MIPS performs well in down-moving markets...
Paul Distefano, PhD
Founder / Lead Developer
MIPS Timing Systems, LLC