Key Takeaway
We've been discussing for quite some time that you can't have such a long and strong downtrend line in the S&P 500 (which lasted the entire year of 2022), and not expect it to be tested as support after the eventual breakout. Should the former resistance line hold up as support, that could be Very Good; however it the support fails and the price ultimately resolves itself to the downside, that could be VERY BAD. So, HERE we are.
In the chart below, is an example of the Dot-Com bubble drawdown in the S&P 500 from 2000-2003. As you will see, this period of time was also marked with a very long and strong downtrend line. In addition, you will see that the downtrend line was broken to the upside; however, could not hold the breakout and ultimately resolved itself back below the resistance line to eventually forfeit another -27% before finding the ultimate bottom. This is why we have been quite cautious regarding the breakout so far this year. I think we'll get our final answer in a few weeks to a month or so. We will either plan to add cash back in, or reduce equities thus raising more cash.
