All three indices closed at year end below the yearly pivot range, indicating a weak position entering 2019. Pivot range is calculated based on the high, low and close of a trading period. The pivot range identifies an area that is called the meat of the market where the market is likely to find support, encounter resistance, and where – if it breaks through – a significant move should follow.
The stock market has found a temporary support for the Christmas Eve low. This low is highly watched and needed to be tested before any significant rise can occur. Normally it will take about 5-8 weeks to finish the re-test process, which will lead us to mid February 2019. February/March is the typical time frame for a seasonal low. If this 2nd low is slightly lower than the Christmas Eve low, it will have a more bearish indication. Regardless, after the seasonal low in Q1 2019, the market will rise to test resistance levels such as the pivot points and pivot range highs level, but it will fail since the eventual goal on the downside of the 4-year cycle is the yearly support level S1 or lower. Also the time needed to finish the 4-year cycle low is not there yet.
The October 2018 high is a confluence of a 4-year cycle high and the high of the half cycle of the 17-year cycle (2009-2026); it will have a stronger correction than what has happened in 2015-2016 correction which was just a typical 4-year cycle correction. At the end of a previous 17-year cycle (1982-2000), it corrected 50% and lasted 36 months. So this time we can expect half of the magnitude of the 2000-2003 correction. So the end of the 4-year cycle (2016-2020) could be around January-April 2020. The price low could happen before the cycle low.
Because we are only half way through the secular bull market (2009-2026), this correction can be bought with confidence. A 40%+ decline of the DOW down to 15000-16000 level doesn’t seem plausible. When the Christmas Eve low is taking out, it will change a lot of market participants’ bullish posture and the sentiment will be overwhelmingly bearish. But we should know this is a normal large cycle correction and it’s not the end of the world.
We suggest our readers to deploy half of their capital in retirement funds to index funds such as SPY or low cost Vanguard index funds when the DOW hits 21042-21600 level in Q1 2019, save the rest of the capital in case it goes lower to the DOW 19844-19985 level.
Some people may find this confusing, since we have said that investors should never dollar cost average down in stocks. The difference is that a stock can go to zero, while an index fund will find its way back when the market eventually gets better. As a matter of fact, we typically would be adding to index funds when it’s 30% or more off its peak when everything is gloom and doom.
In a larger picture, 2019 will be viewed as a consolidation period that will lead to the second half of the secular bull market (2009-2026).
Stay calm and get ready when the opportunity presents itself.