Editor's note: Navigating the market can be difficult during periods of uncertainty. But if you understand how the market behaves, you can take advantage of bullish and bearish setups. That's what our colleague Greg Diamond does in his Ten Stock Trader newsletter. In today's Weekend Edition, we're taking a break from our usual fare to share a recent piece of his, which was published for his subscribers last month. In it, Greg details how you can use history to identify patterns in the market... and explains part of a major story that he sees coming in 2024.
In the world of technical analysis, "Tops are a process and bottoms are an event."
This industry saying tells us that market tops usually take time to develop, whereas market bottoms happen more quickly.
With tops, we typically observe a series of declines and rallies... And they don't make much of a dent in either direction before a big decline unfolds.
Bottoms, on the other hand, tend to be clear... These events happen fast and often feature big reversals from lows, followed by massive rallies.
Let's discuss market bottoms first...
In the chart below, you can see the blue V-shaped bottom, and subsequent recovery, that occurred in the S&P 500 Index back in March 2020...
This bottom/recovery happened after the Federal Reserve unleased trillions of dollars into the economy... following the COVID-19 market crash.
If we go back even further, a similar V-shaped bottom/recovery also occurred in the S&P 500 back in 2009. Take a look at the blue "V" below...
This bottom/recovery coincided with the start of the Fed's "quantitative easing" policy and the passage of tax breaks and other stimulus measures by Congress.
Now let's review market tops using the S&P 500 again but over a longer time frame...
As I mentioned earlier, tops usually take time to develop. Here's the 2007 top that took months to play out in the S&P 500 (marked in blue)...
The backdrop to this topping-out process was a bursting housing bubble, based on predatory bank lending and financial mismanagement on a global scale.
Back in late 2021 and early 2022, another topping-out process took a few months to complete in the S&P 500 before bigger declines occurred...
This topping-out process involved extreme bullish positioning along with the realization that inflation was not transitory. In other words, inflation was here to stay, and the Fed had to hike interest rates faster than most had anticipated.
So what am I expecting in 2024?
Simply put, I'm anticipating a top. But it probably won't be similar to the one we saw in 2007... It will probably resemble the market top we saw in late 2021 and early 2022.
As these charts show, no two tops are exactly alike. And again, market tops take time to develop. I'm not expecting a crash that will take the S&P 500 down 50%. But I am expecting big swings in the market this year.
This means we need to apply a tactical trading strategy.
How do I define "tactical"?
It means looking to trade rather quickly, in both directions, by executing both bullish and bearish trades – not relying on a broad directional bet in the market.
In the short term, I'm still bullish... And by trading tactically in the coming weeks, we'll be able to take advantage of the setups the market gives us.
Greg Diamond, CMT
Editor's note: Using technical analysis, Greg was able to predict the 2020 crash down to the week... and the 2022 sell-off 24 hours before it began. Now, he's forecasting a violent market move around February 14 that could be a historic turning point in the market. This event could double your money repeatedly – but only if you're prepared. Tune in to hear his prediction while you can... Click here for the full story.