We're living in the proverbial interesting times.
As a technical trader, it's intriguing to me that all the headline-generating volatility – and U.S. Federal Reserve inaction – we've seen lately really hasn't made the market nosedive or skyrocket for any significant length of time.
And so investors, who need to know what's coming next, are looking in some strange places to find the answer.
For instance, plenty of technical traders and analysts spend time on "chart analogues," digging up charts from the Crash of 1929 and overlaying today's price activity to generate a plan of action.
I don't think that's very useful – because it's not 1929 we should be looking at…
Rather, it's much more recent history that's telling me what to expect from the rest of 2015 through the New Year.
I've got the answer right here…
The Only Pattern That Counts Right Now
Some analysts are looking back to early October 2014 at the 9.9% peak-to-trough market drop. At the time, the losses wiped out most of 2014's gains, and pundits were calling for a "big reckoning."
But then of course we saw a classic "V bottom" that sent the markets rallying back all the way through December 2014.
I believe we should look back to the price activity of Aug. 6, 2011, to get a feel for where we are now.
At that time, Standard & Poor's downgraded the U.S. credit rating from the AAA it had boasted since 1941 to AA+, leaving open the possibility of a further downgrade.
At the same time, the contagion caused by the European sovereign debt crisis appeared to be spreading.
Global markets swooned, losing around $2.5 trillion in equity value. The major American indexes bled out: The Dow Jones crashed 5.6%, the S&P 500 lost 6.7%, and the Nasdaq shed 6.9%.
The markets did then what they're doing now…
They came off the bottom and traded sideways for several weeks until dropping again through October 2011. The markets tested lows and then soared back from there.
I'm convinced we're in a similar pattern, both technically and fundamentally. And I think we'll see the markets test new lows again shortly.
But on a technical level, the markets are oversold. When that "rubber band" gets stretched too far to the downside, it will tend to correct and snap back up.
There's another reason I'm predicting some recovery this year: I expect some "earnings help."
Here's what I mean…
How Earnings Fit into the Picture
Let's face it: The last quarter's earnings were bad, a disappointment in almost every respect. In fact, it was the first down quarter in a long time, even if it did end up a little better than the analysts were actually expecting.
But here's where analysts can help us out as they build their earnings-per-share estimates and aggregate numbers for the S&P 500.
I believe they'll find the third quarter of 2015 to be much better than the second, and I see that conviction firming up in the markets, too. That improved earnings picture will lend some real momentum to trading into the end of the year.
But… don't expect the recovery to last too long into 2016.
This Will Bring Downward Pressure Back
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.