I hope that all of you had an enjoyable holiday season. Mine was very poignant given the presence of my two year old son who has learned about Santa Claus and the exciting presents he brings, alongside the absence of my father-in-law who passed away at the end of August. It was a nice time to share with my family.
I have little doubt that the recent gyrations of the stock market have left many people concerned about the overall health of the equity markets. I thought that I would share with you tonight why I have been having a difficult time getting too worried about things. To be perfectly honest, I have been using recent dips to add to my positions. The chart below provides a good example of why I have been doing this.
Let us begin with a look at the price structure since the November 26 low. Between November 26 and the highs of December 10 and 11, the S&P 500 rally assumed a five-wave formation. This suggests that at least one more five-wave formation lies ahead. Since that time, we saw a decline from December 10 to December 17 or 18, a rally from December 17 to December 26, and a decline that continued into today's close. What I find telling is the fact that all three of these movements since December 10 unfolded in three-wave patterns. This suggests that they were all corrective in nature. The current wave could be some sort of triple-three formation or it could be a 3-3-5 flat formation. Either way, it would seem that we are within a percent of a significant low.
We can find additional eveidence for this conclusion by looking at two gauges of market breadth- the McClellen Oscillator and the Advance/Decline Ratio. Neither of these gauges confirms today's downward movement. In fact, the Advance/ Decline Ratio is making higher highs as the S&P 500 is making a lower low. This suggests that the current downward price movement does not possess any real breadth at this point, and supports my notion that we are within one percent of this move's completion.
I might also add that the 50-week moving average for the S&P 500 is at 1479.83 this week. I have discussed in previous posts that it has proven quite profitable over the last few years to buy any dips below two percent of this support level. Two percent below 1479.83 is 1450.23. That puts today's close within a price range that would make a good buying level for those people who pride themselves in buying the dips.
It is for all three of these reasons that I am finding it too difficult to get ruffled by our recent price declines. Best of luck, and Happy New Year.
