“Turn that off, it’s time to go to sleep”, my wife said. But I couldn’t pull my eyes away from my phone. The market that had closed the regular trading session just shy of all time highs a few hours earlier, was now plummeting faster than I had ever witnessed before. The “expert” consensus was wrong. The majority of British voters wanted to leave the European Union.
The “Brexit” whipsaw underscores the importance of staying flexible. A bearish macro pattern of lower highs and lower lows that had controlled the weekly chart of the S&P 500 for most of the last year was broken a couple of weeks before the Brexit vote. Bullish! The post Brexit crash sliced through TWO potential higher lows AND the 200 day moving average. Bearish! The snapback rally that followed reclaimed ALL of the moving averages in just 3 days. Bullish! I don’t think I ever flipped my stance back and forth from bullish to bearish faster.
A few weeks on, with the S&P 500 now at all time highs, it’s easy to say that the Brexit whipsaw was just a bunch of noise that was best ignored. Keep in mind though that one of these days we may see the beginnings of a REAL crash. Never forget that complacency can quickly wipe out all of your hard earned gains and then some.
So where does the market have the potential to go now? The S&P 500 has just carved out an ENORMOUS bullish “W” formation visible on the weekly chart. As I mentioned before when discussing the two smaller W’s that make up the bottoms of this larger W formation, the potential measured move is calculated by adding the height of the W to it’s top. I calculated a conservative height that ignores the “tails” of the weekly candlesticks as well as a more aggressive target which includes the full height to draw in the rectangular “measured move zone” in the chart below.
As you can see, a move to the potential measured move zone is good for better than 220 points or 10% over the next year! As long as the S&P 500 continues making higher highs and higher lows above it’s moving averages we will maintain a bullish stance… but as always, stay flexible.