Damage Report – December 17, 2018

Today was another very ugly day in the market. How bad was it? What should an investor do now?

Let’s all take a breath and assess the damage from today’s market action. First, we’ve seen worse. The S&P 500 was down 2.08% today, which puts it in the bottom 9.4% of all trading days since 1950. Put another way, today was in the 90th percentile of bad market days. (The record of -20% on October 19th of 1987 still stands.)

If we’ve seen worse days than this, why am I calling it a very ugly day in the market? Because of the series of support violations we’ve seen since the top on September 20th. The market has now violated 6 support levels in 3 months. Below is a table that shows each of these support fails.

support breach 2

 

 

 

 

 

This is how support breaches are calculated.

  • When the market makes a new all-time high, the breach count is reset to zero.
  • As long as the market keeps making new highs, the breach count stays at zero.
  • Once the market begins to decline, the breach count becomes active.
  • After the first leg down is followed by an uptick in the market, a new support price is established.
  • When the market subsequently declines below the most recent support price, a breach is created.
  • As the market continues to decline, new support prices and new breaches are recorded.
  • The breach count continues to increase until the market makes a new all-time high.

The information value contained in the Breach Count

The breach count falls under the umbrella of technical analysis, and therefore it must be taken with a grain of salt. But it does have information value because there is a very large cohort of investors who are sensitive to this kind of calculation.

In a general sense, a breach means that investors in aggregate are beginning to switch from a bullish to a bearish stance. A breach count of 5 or less doesn’t contain much information value, but once the count gets to 6 it starts to have meaning.

What is of particular interest to me about the current count of 6 is that we have taken out the low price that was established back in January of 2018, when we had our first 10% correction of this market cycle. Not only was the count at 6, but the support that was breached was an important marker for chart watchers.

When should investors become worried?

History shows that a breach count of 6 is not a big deal by itself. When the count gets to 7 or higher it can signal a bear market. Keep in mind that this is only one of many technical indicators that telegraph an approaching bear market. It would take confirmation from several other indicators before I would be willing to sound the alarm.

If you want more details about the Breach Count and how it is calculated, send me a message through the website.

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