Nothing Magical But Useful

Random Thoughts

The Ps (S&P 500) continued to slide, losing well over ½%. This action puts them below their prior breakout levels and it has them closing below their 50-day moving average. Speaking of moving averages, the Bowtie moving averages have turned down and if things don’t improve soon, they will be crossing over. If you are not familiar with my Bowtie pattern, watch this Youtube.

There’s nothing magical about moving averages but they can help to keep you on the right side of the market. The do have some lag but that’s not always a bad thing. It can help to keep you from chasing your own tail, especially if a correction is just that.

Since 2009, every time the market has rolled over it has come right back. True, a 7% slide out of the last Bowtie is nothing to sneeze at but the market came back nonetheless. I can assure you that one of these times it won’t. This is why on signals we take evasive action but honoring our stops on our longs and we go on the offense by firing off a short or two.

Let’s look at the Quack (Nasdaq). It lost just over 1%. This action has it nearing its prior breakout levels, which also corresponds with it 50-day moving average.

The Rusty (IWM) remains the most disappointing. It too lost over 1%. This action has it breaking down out of its short-term sideways trading range. For those keeping score, it closed below its 50-day moving average.

It’s important for the indices to stabilize. Additional weakness would begin shaking out more and more players. Further, it would attract more and more eager shorts. And, based on the number of bears that come out of the woodwork every time this market has a downtick, there seems to be ample supply of them. If the market turns right back up, the predicament of these traders could actually propel the market higher. There’s a pretty bit “IF” in that sentence.

The sector action is becoming more questionable.

Metals & Mining accelerated to new lows, losing nearly 3 ¾%. This is yet another testament as to why we do not bottom fish—they looked “low” several hundred points ago.

Ditto for the Energies except their spill wasn’t quite as bad, they “only” lost another 2%.

It’s not the sectors that were already in downtrends that concerns me. It is those that were recently in uptrends and have either lost steam or have turned the corner decisively.

Chemicals and Foods are two groups that appear to have reversed their uptrends.

Banks, Tobacco, and Manufacturing all appear to be headed lower.

Insurance and Financials have pulled back deeply. Any additional weakness would be concerning.

Real Estate still remains in an uptrend and so far, its move lower only appears to be “knockout” in nature.

Biotech got whacked over 3% on Monday but so far, this move also only appears to be “knockout” in nature too. Obviously though, it can’t continue to lose 3% per day for too long.

Retail is the brightest star out there. It appears to nearly unscathed by the recent market spill.

Aside from areas banging out new lows like Telecom and the aforementioned Commodities, most sectors have either pulled back, pulled back to an inflection point, or have rolled over.

It’s those that have pulled back or are at inflection points that have me concerned.

So what do we do? Do pay attention to what’s going on but don’t make any drastic decisions just yet. Do watch the aforementioned moving averages. In the sectors, if more pullbacks become “inflection points” and more “inflection points” become rollovers then we might just have a turn. The great news that you really don’t have to make any big picture predictions. Leave that to the taking heads. Simply letting the ebb and flow control your portfolio will help to keep you on the right side of the market. Honor your stops. Although it can be a little painful, it’s amazing how stops can often take you out of a market right before it gets really ugly. At the risk of preaching, he who fights and runs away lives to fight another day. Do wait for entries. If the longer-term uptrend does not resume, that in and of itself will keep you out of new trouble. Do pay attention to the database. If we do not see upside follow through—and soon, we will likely start seeing some shorts setting up. The bottom line is to keep your head. Run your portfolio and do the right thing.

Best of luck with your trading today!

Dave