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S&P 500 technical analysis, looking at the past to foresee what is coming next

SPX News by Simon Kazinsky on 16:06 May 21, 2020 EST
We are still at the start of a bear market.

I must admit I didn't consider a flash recovery in the stock market of this magnitude would be on the menu after the very justified shock started in February. While unexpected, this reinforces my view of how important stop losses are. It's difficult to imagine how not reducing positions while the market moves sharply against you can lead to a successful investment strategy in the long run. I guess, however, that perma bulls feel vindicated as, if they were not wiped out in the process, they have managed to recover most of their loses. This could be their demise though if a second wave of selling kicks in which, bytheway, is my central scenario.

Valuations are still ridiculously expensive now that the S&P is about just 10% lower from its top and at the same level as in October last year. On average, listed companies in the index are trading above their 21 multiple (PER). Though dividends are being revised or cancelled a value above 20 is almost guaranteed to lead to a healthier level in the span of a few short years and, considering that we are in the 11th year of the current expansion, the correction is both overdue and expected.

But when is the new leg down going to start?

I am looking at the previous declines in 2000 and 2008 to find clues.

As the SP500 monthly chart the 7 months moving average (highs) has been tested at least once in the two previous major corrections, the dot com bubble burst and the 2007 financial burst. Due to the strength of the current rally we can not discard that testing it at the very beginning of this cycle is off the table. The good news is that, if this is the case, then we are just a couple of hundred points away from the mark and since june will give us a new candle and the moving average is already coming down the gap will be even narrower in a week.

But, of course, we may not reach the level and we should be alert as to when the current rise is over. For this we look at the daily chart and find the 35 days moving average (close) has sustained the previous long term uptrend and also providing support in mid May.

Hence, my strategy is to maintain a short position at this level that will be increased if we reached the 3050 to 3100 area or if we move below 2850, obviously revising this values as time passes and moving averages move.