Random Thoughts
After all was said and done, a lot more was said than done. The Ps (S&P 500) ended perfectly flat. They are oversold and due to bounce but I wouldn’t use that as a signal in and of itself.
Speaking of signals, the moving averages have Bowtied down-(10SMA<20EMA<30EMA). When this happens fairly quickly (from 10SMA>20EMA>30EMA) it suggests that a shift in cycles has occurred. A bounce—ideally a higher low and higher high—is all that is needed to complete the signal. The most powerful Bowties occur when a market is just coming off of major, or ideally all-time, highs. This is because the most amount of people are trapped on the wrong side of the market. Should things worsen, these people will feel the pressure to exit their positions.
Every major top will have a Bowtie or one of my other transitional setups (e.g. a First Thrust) but not ever Bowtie/transitional setup will turn into a major top. There are no guarantees but it can pay to pay attention.
As mentioned recently, multiple back-to-back signals can be powerful. In the case of the Rusty (IWM), we are now on the 3rd Bowtie in a row from all-time highs. On the prior signals, the sell offs were modest, around 4%. And, that’s about where we are now from the recent signal. I wouldn’t rush out and call a bottom though. In fact, the third time might be the charm.
The Quack (Nasdaq) ended slightly higher. It is hanging in there on a relative strength basis but it has lost momentum and appears to be in the early phases of rolling over. As usual though, take things one day a time and wait for signals.
The sector action remains poor. Although some bounced such as the Energies and Chemicals, they and many others still look to make a new leg lower out of a Bowtie and other transitional patterns.
In spite of a flat to somewhat positive overall market, some areas such as Aerospace/Defense slid to make new lows decisively. Some other areas such as Telecom appear to be playing “catch up” to the recent weakness.
Getting back to the overall market, one thing we’ll have to keep in the back of our minds is that every obvious rollover over the last 5 years has turned right back up. And, hopefully, this one will too. Unfortunately, the market can be a bad teacher, lulling you into a false sense of confidence. What’s amazing is that each new bull leg like this one brings in a new crowd–a crowd that seems to ignore the fact that the market can go down. I suppose the hope of human nature never changes. Once you live through a few bear markets, you begin to see both sides. If you haven’t had the privilege of living through a bear market, study the bear markets of the past. As I wrote in Layman’s if you would have bought in 1929 and held on through a 90% loss, it would have taken you over a quarter of a century to get back to breakeven. From ’66 to ’83 there was a 17 year lull. And, in more recent times, it has taken 14 years to get back to their highs.
Anyway, if you ever doubt this, just visit www.whybuyandholddoesnotwork.com.
So what do we do? Again, the market is due to bounce from oversold. I don’t think this will be much of a tradable bounce. Do continue to look to put some shorts on but in light of this action, make sure you wait for entries. As usual, honor your stops on existing positions and let the portfolio ebb and flow do its thing. Yesterday, we had one short hit the profit target and one long hit the profit target. These have been held for a while–long enough to make good cases to exit both. Yet, by simply using stops, the market becomes the final arbiter. My point is, don’t make any drastic decisions. Let stops take you out or keep you in.
I’m going to flesh out all of the above out in a lot more detail in the chart show later today. Based on the recent market action, this will be an important one that should not be missed. Call in sick.
Best of luck with your trading today!
Dave
