From Waverly Advisors’ morning report, some perspective on whether the latest news will kill the rally.
The question on every trader’s mind this morning is, ―was that a one day event or is this the
start of something bigger? Though of course it is impossible to predict the future we can
say this with a fair degree of assurance – after a break like this, the least likely scenario, by far,
is immediate recovery and trading to new highs. In fact, if that happens, it would signify such
incredible resilience that the best trading plan would probably be to simply get long, go on
vacation, and come back in 6 months to see what happened. (That’s not entirely a joke.)
Chances are, this news will be the catalyst that pushes the market over into consolidation and
away from the recent highs.
If this scenario is in play over the next several weeks, we would encourage you to keep the following points in mind. 1) You are going to be deluged with stories from the mainstream media that are full of fear and dire warnings for the future. Read those with a grain of salt and do not to be caught up in the psychology of the crowd. 2) This break and pullback is completely to be expected. A pullback in the S&P Cash to 1,127 would be a 50% retracement of the last leg up. (The corresponding structural level on the DJIA is around 10,500.) 3) We stand behind our intermediate term bullish call on the market, but, as always, we are looking for evidence that suggests we are wrong.
If we are wrong, we will know from the character of the moves and the way the market acts around important support and resistance levels. Based on recent history, the bulls deserve our respect and the benefit of the doubt.
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