First off: Don’t Panic!
So far it’s just a garden variety “correction”. I’d guess we’re on our way to a larger drop but it will take a while to get there, and so far the indicators are NOT saying that.
Here’s a spaghetti graph of a mix of indicators. Don’t worry that it looks like crap and is hard to read which line is what. I’ll sort it out and the ones that matter will get more detail below. You can click on the image to get a much bigger one to look at.
The main ticker here is IWM. An exchange traded fund (ETF) for the Russel 2000, so a good indicator of very broad market actions. The blue line tracking just above it pretty much the whole way is SPY the S&P 500 ETF. They are both moving very much together. At the very top, the green and light gray lines are semi-weaving their way along. EEM (green) being the Emerging Markets ETF while QQQQ is the Nasdaq ETF (so largely Apple, Alphabet/Google, Facebook, etc.) They tend to rise more in bull markets and fall more in bear markets. They’ve had a big run up and at the end took a big drop down (along with the egg yolk yellow Dow Industrials Index just under them at the end).
The more exotic tickers: Bouncing between SPY and QQQQ is JJC the copper ETF. It rises when economies are booming and drops when sales of things are off. Volitile and in the long run goes nowhere, but in between moves fast sometimes. It has dropped modestly at the end, but still indicates an expectation for strong global economics overall. The dark gray / black line is USO – oil ETF. In the long run it tends to slowly evaporate as it is based on contracts, not actual oil. In the short run it is an easy option buy without buying options. It has had a big run up in the last 1/2 year. (You probably noticed at the pump…) Global demand for oil is strong, economies are moving, and the $US is a bit weak.
The gold line is the DJTA (Dow Jones Transports Average) and very hard to see at all. It shows a run up, then a slighly earlier fall than the other stock tickers. That’s common, especially during rising oil prices.
Then, at the very bottom on the far right, TLT the long term bonds ETF. It’s rolling over on speculation that The Fed will continue to raise rates as the economy is doing well. (Well, that IS what they do… euphemistically called “taking away the punch bowl”…)
Now, when all the various stock markets and indexes move together into a drop that usually means a lot of Big Money shorting the hell out of things to drive folks into selling as they have sold off all their “inventory” of stocks and need to get more to re-sell back to you at higher prices. They MAY think it is a market top time and run this down for a year, or they might get enough cheaper inventory in just a few weeks. We’ll know as this unfolds. My bet, given the “Talk Dirt About Trump” theme, the long long up run in the market, and the general Raise Rates Fed, would be that we are in for a down spell of about a year. No, the indicators do NOT yet say that. It’s a guess.
So why guess? Because by the time the indicators call it, you can be down a LOT. AND because I’ve seen this “double tap top” a few times. Watch for a BIG down day, a smaller up, then another BIG down day. That’s the signature of mega-bucks shorts pushing the market down by sheer force of Wallet Size. Eventually they will panic enough folks to collect on the short bet. Only rarely do they give up before then.
First, look at MACD. End of January it called a “Get Out”. (Red on top, “mouth” open downward, histogram – the black lines – below zero.) Now MACD itself is below zero (red and blue lines). That’s a bear call.
DMI / ADX has had red on top since then too. Black has not yet been crossed, so young in this cycle. Magnitudes above 30 so a strong move.
Now back up to Volume. Scan it from end to end in a gross overview way. Note it is generally sloping downward and in Late January early February had two low dips. (I think of that as “two spooky eyes” – in the “Go” game sense). Then volume rises spectacularly in the selloff. Markets are a volume seeking device, and they have found volume to the downside. Arguing against a full on bear market is the large up volume on the bounce back day, but do note that it is less on the second sell-off / bounce back.
Typically the way these things shape up is that it takes a week or two to get a good panic going, so the shorts sell hard in a pulse, let the longs buy back in large, then push down again hard, then another buy back, then when price returns to the SMA (Simple Moving Average) stack from below, they shove really really hard, right when folks who didn’t sell before see thier chance to get out nearly whole. That’s what we are watching for. That confirms a bear market. Price bouncing off the SMA stack from below and continuing down, SMA stack inverting (slowest on top, fastest on the bottom).
So far we don’t have that. Just the opening gambit of a sell-off push. Look back at Aug / Sept. That is an example of a simple “correction”. Prices got shoved down during the summer slow markets, the SMA stack started to invert but then prices instead of bouncing off to the downside, just punched through and the bull market continued.
So that, too, is what we are looking for. Bounce off for continued Bear action, or punch through for return of the Bull.
Now, some time back I went largely to cash. Volume and volatility had gone way low. Prices now are roughly at last July levels. The opportunity to make money in between then and now has been limited (but you could pick a few trade cycles) while the risk of this kind of Short To Hell was very high. But now the game has changed. With improved volatility more trades can cover their costs. BUT: It is VERY hard to play the long side in a short market. You could try to “call the bottom” on a day trading chart, then get out at the SMA stack (or invert to short then if it looks good), but that takes day trader timing. Also, you may well find that price returns to the SMA stack by the expedient of moving sideways as the SMA stack comes down to meet it…
So I shift to more day trade timing cycles and away from long term holdings. Folks who are all “long” stocks and worried need to NOT sell on the big down days. Price return to the SMA stack is the time to sell IFF you want to sell. IF it looks like more “drop days” are being shoved at the markets, sell on the next bounce up day. This is when traders say “buy the effing dips” and then you sell into strength days. You can always buy back in if the stock market punches through the SMA stack for another run up; so if you were “stop loss” exited a week ago, you have plenty of time to get back in as a wash sale. No need at all to do it the very next day, or even 4 days later (settlement done).
It’s an odd thing, but this kind of “chopping top” requires very great patience for longer term focus as well as a hair trigger for day trades. Just be sure to remember which one you are doing…
Also realize that for all the Talking Heads talk about what “investors” are doing or feeling: The Market is 75%+ automated computerized High Frequency Trading by major financial institutions and driven by folks with multiple $Billions to toss at the market when they want to move it. We no long have the “uptick rule” so you are NOT safe and do NOT have time to just “look at the market once a week” and then decide to sell (or buy). Shorts can now short endlessly to ruinous prices. What was learned in the recovery from the 1929 crash was thrown out just prior to the 2008-9 crash.
So YOU can not influence markets at all, either singluarly nor even in significant groups. It is no longer an “investors” market; it is a Financial Institutions Casino and THEY know how to run the table with their nearly infinite Fat Wallets. (Do YOU have an unrestricted line at The Fed?)
Close Up On Spy
So here we can see the price bars much better. Note the little red dots near them? That’s the PSAR indicator. For folks who trade: it calls when to get in / out by swapping sides of the price lines. Generally it is a lag of a day or two, and it can be choppy in trendless markets, but it’s a good call on major movements. It’s clearly saying be out now and not get back in yet. It made the “get out” call end of January / start of February.
Next, you can see how much volatility has spiked. Volatility is lowest at market tops, highest at bottoms.
Below it you can see RSI and Momentum, both showing time to be out (below the zero line). They can lag a bit, and in sideways chop can make many fast useless trades, but in trend driven markets generally call the trend well.
Now, back up at those price bars. Notice how short and squashed they were back in October / November? That’s why I was saying I was sitting out for a while. That happens just before local tops (and strongly before market major tops). Yes, I missed some run up. OTOH, I didn’t have to watch the markets daily being ready to pull everything out at the drop of an index. Now look at the price bars on the far right. Giant things. Huge price ranges. IF you are buying anything in these dips, it is important to pick your price. A “market order” can happen anywhere in a very wide range. Either you time your buy (sell) with a fast (minutes) chart, or you pick your price.
The furthest right price bar is interesting. It’s a small box with long ‘tails’. Generally these are called “Kangaroo Tails” and the notion is that price “springs away” from the long tail. This shows high and low at the end of the tail and open / close at the edges of the box. It ought to mean Monday will be a somewhat up day. Traders tend to close out their positions on Fridays, especially in volatile markets, and I’d expect Monday to be a battleground day between the shorts and the ‘long’ investors. I’d also expect some shorts to sit out a day or two, let the folks rush back in, then at the SMA stack short like crazy again for another major down leg. That is ONLY if “they” have decided to make this a major market top. If it’s just reloading the inventory for another run up, and it punches through the SMA stack, well, we’ll know.
Note that all this is somewhat SPECULATIVE. With the move to algorithm driven computer trading, it now all depends on who updated what computers with a new method. With a big enough wallet, you don’t need to wait for folks to get back in, you can just short to zero… So I’m more tepid about ‘buy the dips’ than I was a decade ago. I’d rather wait until I know what trend “they” have chosen…
At Present, the indicators still say it is an uptrending market and this is just a correction. I continue to treat it like that until the indicators confirm it has swapped to a Bear Market. We ought to know in a few days.
As usual: None of this is investment advice. It is only for educational use on how to read charts and a description of what I do for me. What you do is entirely up to you and you must consider your personal position. Oh, and remember that I’m just an amateur at this and if you really want to play in this sandbox, get professional help…