Market Omen or Myth? Decoding the Recent Monthly Overextension Pattern
8 instances in the past 70 years where the end of a 5-month winning streak ended without price recovery within 6 or 12 months, searching for similarities to the current market structure.
April ended a 5-month winning streak, a situation that has occurred 30 times since 1950 (not necessarily in April). While most recovered within six or twelve months, eight did not.
This special edition focuses on the technical indicators of those eight exceptions, comparing them to the current market structure.
By definition, a 5-month winning streak can signal overextension. It's normal for technicals to reach overbought levels, and pullbacks are expected. However, sometimes the first down month after a winning streak isn't just a pullback. It can be a warning sign of a bear market (1 case), the beginning of a decline before a bull run ends (4 cases), or a correction (2 cases).
Since seven of these eight events preceded significant declines, some immediate, some months before the actual crash, it's crucial to analyze if the current market shares similarities with those cases.
The analysis ends with the monthly chart for 2024 and the potential implications, because there are similarities with several cases.
Consistency is crucial for me and is a key element of trading success:
This analysis is intended to be a reference for a couple of months, as the previous one published a month ago where the peak of seven overextensions were analyzed. the current pullback is following that script and the analysis still provides references of what to expect this year. (Link to the previous analysis below).
This new edition builds upon those findings by exploring the potential depth of the pullback and what might unfold in the coming months. It's a must-read document for anyone interested in the market's direction.
This document also considers the scenario of no further pullback in May and a resumption of the rally, considering the level where a correction or bear market could start (Remember when I anticipated $5110 as turbulent zone for SPX, that was in December 2023, four months in advance)
The eight occurrences analyzed in this document are: