A 40-50% Move Coming In Stocks?

bearbull1Chris Ciovacco:  A May 16 article outlined the concepts shown below in detail; big moves often come in the stock market after long periods of consolidation.

Normal Retracement Or New Trend?

Is there anything else historically that says a big move may be coming in equities? Yes, the concept of Fibonacci retracements (see chart below). It is normal and to be expected that in the context of an established downtrend to see countertrend moves back to one of the three major Fibonacci retracements (Fibs). So far, in 2016 the sharp rally off the February lows has not exceeded “normal retracement” territory. In this case, retracement refers to the retracement of the down move from point A to point B.

Fibs Help With Bullish and Bearish Odds

Do markets always reverse near the major Fibs? No, Fibs simply help us with probabilities. The weekly chart of the NYSE Composite (2006-2016) below shows a bearish case and a bullish case.

The point of the exercise is that big moves can result once the market decides which way it wants to go near the 61.8% retracement of a large market decline. The bearish move from the 61.8% level in 2008 to the 2009 stock market low was a drop of 56% (a big move). The bullish move between the 61.8% level in 2011-2012 was a gain of 44% (a big move).

How Much Value Can Be Added Or Lost?

The table below puts a 56% drop in perspective based on numerous portfolio sizes.

Conversely, a 44% gain can make a significant contribution to an individual’s nest egg.

Big Move Can Be Up Or Down

The market was on the ropes in early February and righted itself after central banks started throwing spaghetti at the monetary policy wall.

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