My expectation is that the market will rally tomorrow in the face of the S&P downgrade. The market may open in the red and may not close in the black, but regardless I expect it to move higher and not lower during the trading day.
Why? It’s all about timing. The market is extremely oversold right now with the RSI reading an astonishing 23! The last time we saw a reading this low was during the bottom of the last bear market in 2008. The market HAS to rally here because the sellers have already exhausted themselves. The S&P downgrade is already baked into the cake.
Looking at the chart below, the market has put in a clear “head and shoulders” pattern.
I would place the odds at 50/50 right now as to whether this decline ultimately exceeds the 20% bear market threshold. My inclination is to be defensive and sell into strength here.
However, keep in mind that a bear market does not go straight down. A bear market is punctuated by steep sell-offs followed by breath-taking rallies. In one of my first posts, Anatomy of a Bear Market, I detailed the long, gut churning path that a bear market takes.
I think it is far more likely that the next 5% move from here will be higher and not lower.
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