How bearish are "death crosses" and oil crashes for the stock market


As I thought yesterday, mainstream financial media has “death cross” plastered all over the headlines. (A death cross is when the stock market’s 50 day moving average crosses below the 200 day moving average).
Here’s the definitive guide as to whether or not this is factually bearish for stocks.
Let’s determine the stock market’s most probable direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty.

Are death crosses bearish for the stock market?

As I mentioned yesterday, the Russell 2000’s recent death cross isn’t consistently bearish for stocks.


The NASDAQ will make a death cross over the next few weeks.

This isn’t consistently bearish for the NASDAQ

The S&P 500 will eventually make a death cross too.

This isn’t consistently bearish for the S&P.

The Dow will eventually make a death cross too.

This isn’t consistently bearish for the Dow.

The overarching message is simple. When the stock market makes a death cross:

  1. It can face short term weakness over the next 1 month, but…
  2. This is not consistently bullish nor bearish for the medium term or long term.

It also doesn’t matter if the death cross occurs while the 200 day moving average is going up or down. Here’s what happens next to the Russell when it makes a death cross while its 200 dma is going down.

Oil’s decline

What makes the stock market’s recent decline really interesting is that while the stock market has fallen, oil has fallen even more. (The decline in oil has partially contributed to small caps’ underperformance). This has caused the S&P:oil ratio to rise.

Here’s what happens next to the S&P 500 when the S&P:oil ratio’s 14 day RSI exceeds 77
*Data from 1983 – present

As you can see, the S&P has a strong tendency to go up 9 months later.
Here’s what oil tends to do.

As you can see, oil is neither consistently bullish nor bearish.

Big gap up and downwards reversal

“Gap ups” are becoming more and more common nowadays thanks to globalization (more and more traders from Europe/Asia trading S&P futures).
The S&P on Wednesday gapped up more than 0.5% and then closed more than -0.7% below the previous day’s close.

Is this a bearish sign? Does this mean that the stock market “just can’t catch a bid”?
From 1962 – present, there has only been 1 other case in which the S&P gapped up more than 0.5% on the OPEN and then closed more than -0.7% below yesterday’s CLOSE


Let’s expand the sample size by relaxing the parameters.
Here’s what happened next when the S&P gapped up more than 0.4% on the OPEN and then closed more than -0.4% below yesterday’s CLOSE
*Data from 1962 – present

5 days in a row

The S&P has fallen 5 days in a row (again). That’s quite a lot of “down 5 days in a row”s in the past 30 days.
Here’s what happened next to the S&P 500 when it had more than 2 “down 5 days in a row” streaks (non-consecutive) in the past 30 days.

As you can see, this isn’t consistently bullish nor bearish for stocks
Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019.
  2. The medium term remains bullish (i.e. trend for the next 6-9 months).
  3. The short-medium term leans bearish. There’s a >50% chance that the S&P will fall in the next few weeks.

Focus on the medium term and long term. The short term is usually just noise.
Our discretionary outlook is usually, but not always, a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
Click here for more market studies

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