U.S. Stocks Back At The Pass/Fail Line
Back in August-September, the broad stock market held THE critical support level it needed to; it is now testing it once again.
On September 29, we posted a piece we titled “U.S. Stocks Facing Their Biggest Test In 8 Years?” As the title suggests, we thought it was an important post – or at least, the topic of the post was an important one. At the time, the U.S. stock market was in a full-fledged re-test of the lows it made during the August crash/selloff. The important part was that a key measure, in our view, of the broad equity market was testing a potentially make-or-break support level on its chart.
The index is the Value Line Geometric Composite (VLG). For those still unfamiliar with it, the VLG is an unweighted average of roughly 1700 U.S. stocks. This makes it, in our view, perhaps the most accurate barometer of the true state of the U.S. stock “market”. Thus, the VLG is a main focus of ours among all the indexes. In late August and again in the September post, we highlighted the significance of the mid-430′s on the VLG chart. To reiterate, here were the reasons we highlighted the area as so critical:
- The 23.6% Fibonacci Retracement of the 2009-2015 Rally ~436
- The 38.2% Fibonacci Retracement of the 2011-2015 Rally ~436
- The 61.8% Fibonacci Retracement of the Rally from the 2013 Breakout Point to the April High ~433
In September, the 1000-day simple moving average (approximate 200-week) was also in that vicinity, but it has now risen a bit higher into the low-440′s where the index closed on Friday.
As we have stated before, when a security or index bounces off, or “respects”, levels that we think it should, it adds confidence in the validity of the levels as important. During the late August crash-like drop, the VLG bottomed just above the mid-430′s area. During the re-test a month later, the bottom in the VLG occurred on the very day of our post, September 29. Thus, considering the action in late August and the response of the VLG to the mid-430′s level in late September, there should be little doubt about the validity of the level. Furthermore, while many observers no doubt chalked up the September post title “Biggest Test In 8 Years” as sensationalism, hopefully, they can now appreciate its rationale and relevance.
So you can obviously now add the August and September lows to the list of reasons why the mid-430′s level is so important. We bring this topic up again because – guess where the VLG is trading today. Yep, it is again testing the key mid-430′s area, hitting a low of 434.74 today.
We’ve laid out the reasons that make the mid-430′s an area of interest for the Value Line Geometric Composite. But why exactly is it so important the VLG hold this level? As we wrote in the September 29 post:
First of all, [breaking this level] would establish an unambiguous lower low on the chart below last October’s lows. Furthermore, it would create a formidable resistance level here for any future rally attempts.
Secondly, a failure here would knock out the first major Fibonacci Retracement level of the post-2009 rally. And while it does not necessarily guarantee an end to the cyclical bull market, it certainly puts a significant dent in it.
On a shorter-term basis, the break of the 61.8% Fibonacci Retracement of the rally since the VLG’s 2013 breakout would be a serious indictment. It would leave the index open to possibly (or, likely) retracing the entire rally since the 2013 breakout. A breakout that cannot sustain enough momentum to avoid an entire retracement is [often one] that is not long for this world (no pun intended).
Lastly, what was so important 8 years ago that we labeled the September test of this area the biggest for stocks since then? Again, from the September post:
The last time we saw such an important test by this index was 8 years ago. After holding a key level (near 440 – almost the same level as today!) in an August 2007 selloff, the VLG was back testing the level again in November. Similar to today’s set of circumstances, that level marked several major Fibonacci Retracement levels from key points in the 2002-2007 cyclical bull market.
In 2007, the VLG struggled with the test, giving way immediately before rallying back up above the 440 level for a few weeks. However, that proved short-lived as the index eventually dropped below that level in early January…for good.
Does the 2007 failure guarantee that this similar setup will also fail?
Obviously not – and we are not trying to suggest that. However, we do view this area as being of the utmost importance for the U.S. stock market. A successful hold here and the prospects for resuming the bull market are improved significantly. A failure would open the downside in the VLG to the next key Fibonacci cluster near 380, or another 12% lower. Additionally, the sustainability of the post-2009 bull market would be cast in further doubt.
As we concluded the September post with, we don’t label many spots on U.S. equity charts as “make or break” for the broad market. However, the mid-430′s area on the Value Line Geometric Composite is as critical a level as we can give you in any index or security. The VLG received a passing grade on its test in September. Its grade – pass or fail –
on further tests, now and in the future, could very well go a long way in determining whether the bulls or bears have the upper hand in the longer-term.
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More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
