TYPES OF RETESTS: UNDERCUT LOW, A FULL RETEST, OR A PARTIAL RETEST

 

Many Wall Street analysts and media pundits are discussing a “retest of the late December 2018 lows.” Who can blame them, especially following a historically strong topside move in January? Additionally, the domestic equity market, as defined in this case by the S&P 500 (SPX/2706.53), should pause/consolidate or pull back based on a number of measuring tools. These include overbought indicators (this has been the case for over a week—it is bullish when an overbought market fails to decline), retracement level (2714—the 2/1/19 intraday high was 2716), proximity to 200-DMA (currently at 2741) and previous price peaks (2800 to 2815—chart below), and volume at price levels (between 2700 and 2780, shown in 1/22/19 Tech Talk report). Last Friday on social media, an Institutional Investor All-Star analyst penned the following:

 “SPX up 15% over last 38 calendar days since the low. Since 1957, the average rally before a retest during 19% declines was 14.5% over 36-days...”

Where do I stand? In addressing the topic of a “Retest” during our recent Technical Analysis webinar (1/15/19), I discussed certain ways the SPX could retest its 12/24/18 low of 2346. Specifically, an undercut low of the initial low occurs—the SPX goes below the 12/24/18 low. A full retest of the initial low occurs—the SPX pulls all the way back down to the 12/24/18 low. A partial retest of the initial low occurs—the SPX doesn’t pull back all the way to the 12/24/18 low but stops declining somewhere above it. During the webinar I also stated that, due to the historically strong demand readings on both a volume and stock basis coming off the 12/24/18 low and the recent violation of the downtrend line drawn off the October 2018 high, I believe that the probability favors a partial retest of the 12/24/18 low, not an undercut low or a full retest of the low.    

At what underlying levels am I looking? In a business that requires 100% certainty, the best I can do is implement a weight-of-the-evidence approach. I attempt to discern areas to which a partial retest may retrace by using two different methods.

  1. Previous pullback/breakout levels and/or moving averages. Please refer to the chart below.

  2. Retracement levels (between 50% and 66% of the current advance) once a peak is reached and the pullback starts. In other words, I won’t be able to measure retracement levels based on the topside move that started 12/26/18 until after the current rally shows definitive signs of reversing, which it currently hasn’t exhibited.

 At this point, stay focused, stay patient, stay unemotional as best you can, and, most importantly, please manage risk.

S&P 500 Large Cap Index. S&P 500 with 200-DMA rising. 50-DMA rising 2-DMA.

Last-minute Chart: Technical Analysts classify price patterns as either “reversal patterns” or “continuation patterns.” The pattern of accumulation shown below is a reversal pattern and is bullish.

Light Crude Oil - Continuous Contract. 1 year with falling 200-DMA at $64.10.

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UPCOMING EVENTS

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 02.02.2019. Chart sources: StockCharts.

PDF Copy of Article: Day Hagan Tech Talk February 4, 2019 (PDF)

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