A few things to address before the long weekend…

This is a quick n’ dirty update to bring you up to speed on a few things that I think you will want to know. Kind of a summary of my main messages of the blogs and videos of late. Here goes:

 

You know that I have been cautioning and ultimately correctly calling the bear market since January. Recently I outlined a pattern that could play out in this market, based on how other bear markets have acted. Read this blog for details on historic bears, but here are the main points that I have been outlining in various blogs since January:

  • A bear is identified by the break of the 200 day (40 week) SMA, a low, rally, then lower low. Those conditions became fulfilled recently.
  • Bear markets can follow a 3- wave pattern, aka EWT, as outlined in my January blog here. Don’t get too tied up in this potential pattern, but its a decent guideline.
  • You can trade the rallies (large and small) in a bear trend. I am convinced a rally is coming in the next few days, as discussed here. In order to best identify a high probability bounce (vs. getting lured in by a head-fake like the rally days) look for candlestick formations that often signal reversals. The chart below shows us that the most recent bear-market rallies were signaled by two reversal candles.

For example- You see a couple of bullish white (positive close) hammers leading the brief rally in January.  Then two red inverted hammers (negative close) leading the late March rally. Now, we may have the makings of two “spinning tops”- depending on how today (Thursday May 19) finishes. I will wait to the end of the day to confirm, but if we got a spinning top as last Thursday, we might have that two reversal candles I am looking for. If not, we bide our time. Spinning tops are a sign of market indecision. They consist of lots of action during the day (big range) , but ultimately a very tight finish to the day, often near the middle. It looks like a little wee body (open and close) surrounded by a tall wick on the top and the bottom. The conviction of the bears (or bulls) is losing steam. Things are likely to change soon.

Assuming we get a second reversal candle today, or tomorrow, or early next week – the next thing to watch for is a positive follow-up. Don’t buy until you get one or more days of upside following the two reversal candles. Again, this strategy is for aggressive investors only. We are attempting to play a rally within the greater context of a bear market. So, mind your stops, and keep your discipline. Sell if the formation fails (lows are broken). Take my Online Course for more on this.

  •  Next point: Focus on low beta stocks, inflation sensitive stocks, and defensive sectors as described in my last blog. And cash. Use the rally, assuming I am correct about one coming, for its upside potential, then consider raising more cash if the SPX reaches somewhere near its 200 day SMA.
  • Next: get in the habit of checking my video page for topics of interest -or better yet, subscribe and get them emailed to you each week. I cover ideas NOT presented on this blog. For example- the last four videos covered: Investing in Canadian stocks and the dollar outlook, Defensive sectors, An outlook with targets for the NASDAQ, and an analysis of the Canadian REIT sector.
  • Finally: Subscribe to this blog to get it emailed to you regularly. For those who kindly responded about the missing graphs, the problem is being looked into an an ETA for the charts to be universally available to all subscribers will be rectified in the next 2 weeks. Also, be sure to forward any of my blogs to friends and family and encourage them to subscribe.

2 Comments

  • Keith I’m curious as to your rationale for buying low beta at this point when you expect a rally. Wouldn’t you want high beta if the technicals are strongly indicating a bear rally? Or do you play it safe until technicals indicate the bottom of the bear market and only then switch to high beta? Lately when low beta moves ~1-2% a day, high beta is ~5-10%.

    I’m primed to buy and came very close this morning to pulling the trigger on the big short dip but it was over in a flash.

    Have a great long weekend!

    Reply
    • George–thanks for asking this and yes, I can see how I didn’t convey my message properly. Me learn to need write more description better-er. Ha ha.
      So, for the record–I am saying that you buy a market index or even a high beta play for the rally…but for the balance of the bear market, any stocks/ positions you hold should be low beta, commodity, and lots n lot of cash!!

      Reply

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