A Repeat of 2000 And 2008 Luming? A Critical Look At The S&P 500.

The S&P 500 has declined by 17% since the high of August. This includes a further decline of 11% since my last update. 

The price made light work of the trendline I highlighted in my previous article, breaking through it and declining further to the weekly 200 simple moving average (w200sma), where the price is now finding support. 

Below I have the weekly timeframe of the S&P 500

Ignoring the 35% decline caused by CV19, the last time we saw the price break and close below the w200sma, which materialised into a bear market, was during the financial meltdown of 2008. The price then declined by a further 50%.

Below is the weekly timeframe of the S&P 500.

Since moving back above in 2010, the price has used the w200sma as support in 2011, 2016 and 2018.

The question is, will the w200sma hold firm in 2022 and force the price back up? If the price does break through, this will be significant and when we will officially be in a bear market, the first since 2008.

Here are the possible outcomes:

1. The w200sma holds firm and gives momentum back to the bulls. A move back above the daily 200sma is when I will resume taking long positions. NOTE: As a trend follower, this is my bias based on historical patterns BUT I am still very much prepared for a bear market.
2. The price confirms a bear flag below the w200sma, just as we saw in 2000 and 2008, and I start taking short positions. Applying patience for a bear flag is to avoid a fake breakdown. NOTE: Value investors buying stocks going for a discount will face significant losses.
3. The market consolidates at this current price level before dictating further strength or weakness. Here we can only apply patience until the market dictates a clear direction. 

There is plenty of fear-mongering across all media channels. The world is indeed facing challenges, but what's new? There are new, different and repeating challenges every year.

In terms of price behaviour, what we are seeing is one of those natural corrections in the market that happens every few years. Why it is happening, we can all speculate. Whatever your conclusion, there is no getting away from the fact that IT IS happening based on price action.

We simply need to protect capital at certain times, allocate risk, and take positions at others. If a bear market is confirmed, I will switch my current stance of capital protection to shorting the market. 

As investors, we must stay ready for all eventualities and be prepared to act when optimal market conditions, bullish or bearish, present themselves.

I continue to apply patience for now and focus on the forex market, which is displaying trending characteristics. 

Image sourced from Shutterstock