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The Next 7 Days May Determine This Market's Fate

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Jeff Clark thinks it's too early to give up on this as a bull market

I may be wrong, but here's my personal conviction: it's too early to give up on this bull market. Yes, all the major averages are down sharply from their April highs, and much of the damage occurred in just the past month. But you can't call it a bear market yet – at least not until the end of the month.
 
You see, the difference between a bull market and a bear market is just a thin, blue line.
 
Take a look at the following monthly chart of the S&P 500, plotted against its 20-month exponential moving average (EMA):



You've seen this chart before. I use it to define bull and bear markets. It's relatively simple to read. If the S&P 500 is trading above its 20-month EMA (the thin, blue line), then it's reasonably safe to assume we're in a bull market. But if the index trades below the line, it's more likely the bear is in charge.
 
According to this chart, we're in bear market.
 
But... not so fast. The market is never that easy to read. Keep in mind this is a monthly chart. So all that matters is how the S&P closes at the end of the month. Right now, the chart reads bearish. But if the S&P can somehow miraculously rally and close above 1,213 by the end of August, it will erase the breach of the line and the bull would regain control.
 
It would be just like the stock market to throw us that sort of curveball, wouldn't it?
 
I know the odds are against it. But this week, I'll put my money on the bull. It's too easy to call this a bear market – and too many people are doing just that. So it may be time for a strong, counter-trend rally to muddy the waters a bit.
 
Take another look at the previous chart and notice the action back in August 2000, when we entered a bear market. You can see the breach of the line and the snapback rally that pushed the S&P up to test the breakdown level. The same thing happened in early 2008, just as that bear market was kicking off.
 
This is important, because even if the market doesn't rally back to the 20-month EMA right now, it's very likely it will rally at some point. It's usual for prices to come back and test breakdown levels. So we'll likely see the S&P 500 come back over 1,200 at some point.
 
I'm betting it happens sooner rather than later.
 
If it happens by the end of the month, I'll make a further bet: the bull will continue to run. If that happens, I'd encourage you to use any weakness in September as a chance to buy stocks. But if stocks can't rally between now and the end of the month, I'll take this as a sign that the bear is really back in charge.
 
Either way, the next seven trading days may determine the market's fate. Keep a close watch on the markets.
 
 
Best regards and good trading,
Jeff Clark
Growth Stock Wire
TradeKing All-Star Commentator


Editor's note: Veteran trader Jeff Clark is author of Growth Stock Wire, a daily read providing investors with a pre-market briefing on opportunities in the global stock, currency, and commodity markets.  Click here for more information… and a free report designed to hone your trading strategies.

Jeff Clark / Growth Stock Wire holds no positions in any securities mentioned in this post.
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