I've shown this chart a couple times in the past few weeks, albeit mostly through video:
(You can click on the image to view a larger size)
This is the S&P 500 the past 6 months and what I've drawn in are three things.
A trendline that shows the recent support and resistance.
The wedge pattern the market has been trending in as of late.
The trendline is the green/red horizontal line on the chart that shows over the past six months most of the time when the market was higher and hit the 1,275 area it bounced off and resumed higher (when it's green). However, once it fell below each time it hit the 1,275 area it bounced off and resumed lower (when it's red).
The wedge pattern started with the market starting to hit each of its peaks earlier in the year at lower levels. This is a bearish sign often occurring prior to a larger scale decline. This same pattern preceded the nasty bear markets of 2000-2002 and 2007-2008. The pattern further developed as it began to rise from its low of the year around 1,100.
What we see now is the rising wedge coming to its point. This is generally a make or break point in market history. If it makes it out of the wedge to the upside typically a fairly strong rally ensues. When it breaks to the downside a fairly significant market decline often occurs.
For the past month I've been skeptical of the markets attempt to rally higher and needed to see a breakout higher than 1,280 before I'd be convinced my conservative take lately was wrong and moving more into stocks was prudent. While I can't be sure a large scale market drop is coming, I am glad we've been patient and conservative the past few weeks.
Back in late September the market broke to the downside of this wedge only to rally back in less than 10 days. This could happen again so I don't see any reason for panic. A well balanced, diversified portfolio should hold up just fine even if the market drops a few more percent. However, any overly aggressive investors should be extremely careful right now.
If you're a client - don't worry - we don't have a single aggressive portfolio right now and haven't for some time. Our plan is to remain patient and not increase risk assets (stocks namely) until there is sufficient evidence both from a technical and fundamental perspective to do so.