Much as been written and discussed by traders since June following the start of the bear market that plagued global equities in the first half of 2022. Each up tick gets analyzed to death and questioned, “was that THE bottom?” is what market pundits keep asking and traders keep attempting to answer. In my own Thrasher Analytics letter, I’ve been discussing price levels I’m watching and key indicators and markets that may give a clue through leadership or confirmation if we’re shifting out of a bear market and into a new up trend or if we’re just in the throes of a bear market rally.
One such tool available to technicians is reviewing the amount of the prior decline the bounce has retraced or ‘made back.’ What we’ll discuss today is the 50% retracement level. I’m not one to often use Fibonacci sequences or retracements but many traders I highly respect do. Many would argue that 50% is not actually a Fibonacci number even though it’s often shown in many charting software packages. My focus has less to do with rabbit reproduction (the original purpose of Fibonacci numbers) and more on the market psychology of recovering half of a market decline.
Last week Carl Quintanilla shared a chart by Jonathan Krinsky, CMT, Chief Market Technician at BTIG, noting the importance of the 50% retracement how bear market rallies don’t exceed these levels in the middle of drawdowns.
Looking at market history for both the S&P 500 and the Dow Jones Industrial Average (which has a longer history of data available to me, back to 1900) I reviewed each time the closing price came within half a percent of retracing 50% of the prior decline after the drawdown has exceeded -20%. I chose half a percent as to allow a little ‘wiggle room’ for price to come a few points above or not quite reach the threshold of 50% and still be included in the study. It’s the general theme we’re here for after all.
Let’s start with the Dow
Here we can see every major decline in the last 122 years. Blue arrows indicate when price came with 0.5% of retracing 50% after a ‘bear market’ had begun.
And here’s the S&P 500
You’ll notice that one of two things occurred each time. 1. Price continued to advance higher, as it did in April 2019, June 2009, and June 2003 (noting a little theme with June). 2. Or the rally ran out of steam and sellers took back control of the tape, like in May 2001 and March 1930.
Thankfully, the sample size is small, meaning we haven’t seen many large drawdowns to review and many of them reached the 50% retracement level and continued to move higher. This is not to suggest that the 50% recovery level is the ‘end all be all’ to closing the door to market down turn. The market can always throw a curveball, but our ability to review market history gives us insight into how price has responded at such a level. It seems that traders become more confidence in the durability of the low after it’s able to recover half of what had been lost.
Where’s that leave us today?
Here’s the S&P 500 chart again but zoomed into to the last 22 years. The 0.5% range around the current 50% threshold is 4252-4209. This is just above the heavily watched 4200 level that was roughly defined by the March swing low and June swing high earlier this year. As of Friday’s close, we’re about 2.5% from the S&P being in that range so if buyers remain in control, it’s very possible we see how price responds in the next week or two should the index push higher.
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