In terms of downside volatility—or lack thereof—2017 was clearly the anomaly. The downside volatility the equity markets have experienced thus far in 2018, while much faster than I expected, is not unusual if we look back to the 2009 long-term bottom in the S&P 500.

Since 2010 and including 2018, the S&P 500 has experienced five separate declines of 10% or greater—line chart is shown below. Each of the below declines did not hinder the Secular bull market, and I feel the odds favor the same with the recent decline. Simply said, the odds favor that the technical ingredients necessary to signal the end of the current Secular bull market were not present at the recent equity market highs.  

S&P 500 Index chart from March 2009 to 2018.

While history never repeats itself exactly, many times it rhymes. In looking at the weekly bar chart of the S&P 500 going back to mid-2009 and identifying each of the four previous 10%+ declines, I notice that each decline experienced a “Low, Rally, Retest” sequence (W pattern) that took place over a matter of weeks, not days. While there was a “Low, Rally, Retest” sequence last week, which is encouraging, it occurred over a matter of a few days. In other words, I think the odds favor that this bottoming pattern develops over a longer period. Part of this bottoming process would include consistently strong internal readings, as measured by advancing volume over declining volume and breadth thrusts, during any rally tries. Strong internal readings during further rally attempts would, in my mind, confirm that selling pressure has been exhausted and that demand is back in charge. Moreover, in a perfect world, I’d like to see the rally occur with investors still cautious, i.e., excessive optimism doesn’t come into play too quickly.

S&P 500 Weekly Log Bar Chart. Each of the bottoming patterns, highlighted by the blue circles, took place over a matter of weeks and looked like a "W".

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Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written on 02.12.2018. Chart sources: Red chart source: Barry Ritholz, Bloomberg and Yardeni Research.

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