Sunday, August 30, 2015

Weekend Market Report: Looking Ahead

Statistically speaking markets tend not to crash in the month of August which is why I feel what happened last week was merely a 'dress rehearsal,' but since almost all independent market observers agree that a deeper and wider correction is needed in the market I've been trying to imagine what a pullback might look like in the coming months.

The narrative I have chosen is as follows: if Central Banks and major investing institutions have learned anything from 2008 it's that market corrections are not necessarily a bad thing if the gas in the balloon is let out slowly over time. Time is a critical factor here - it enables people, investors, corporations and central banks to adapt. With interest rate increases on the horizon I would like to think that any decline in the market forthwith is allowed to happen in a orderly fashion between around October and April, much like it did in 2000/2001.

Between now then however, a lower high first needs to be put in and for that to happen a buy signal needs to be produced. Since the end of the labor day euphoria in the U.S. I expect a decline to occur next week (a higher low on the RSI) whereupon the remainder of the month will be spent putting in a lower high. In this fashion institutions will be able to unwind long positions and enter shorts over the month of September since the market's appetite for a market decline has now been gauged.   

What happens in the coming months might look like this:

The monthly pivot of 2116 would be an ideal place for this long term retracement to happen but a strong buy signal on the RSI needs to happen first in order for us to get there. Overall September should be a strong month, especially so since the U.S. Federal Reserve needs to announce interest rate increases during a period of robust market growth.

Jakob Richardson © 2015