David Lin: How the Mother of All Market Rallies Would End
The strong market rally is like a rubber band being pulled. Eventually, there’s likely to be a snap back. And technical indicators can give an idea as to how much and how quickly markets can pull back.
One indicator is a Fibonacci retracement. Retracements are simply pullbacks that give back part of a recent market rally. Typically, a minor pullback will lead to a 37% retracement. From that level, stocks may find a base to move forward again.
If that level of retracement isn’t enough, the next stop is 50%. Again, that’s just 50% of a recent rally. If the market is up 10% over a few months, a 50% retracement still leaves the index up 5%.
But it also means investors are more cautious and looking for other opportunities going forward.
In the short-term, stocks remain in a long-term uptrend. That trend looks likely to continue.
However, there may be a strong pullback once the next one happens. That would reflect the strength of the current market rally.
Plus, depending on where money is flowing in the market can indicate a selloff is coming. If money is going out of tech and into defensive stocks, there may be a decline ahead.