Enough to make your head spin!

Wow. The market sure is neurotic lately. Bullish, or bearish…its like the weather in Alberta. Albertans like to say “If you don’t like the weather, just wait a few hours – and you’ll get new weather!” Similarly –  If you don’t like the current market trend – just wait a couple of weeks – and you’ll get a new market trend!

Take a look at the daily chart of the SPX below. It’s just on the verge of reversing what looked to be a new neartermed downtrend. 2950 was the last major peak. But just below that, at around 2900, lies the last minor peak on the short termed chart. If it fails at or below that 2900 area, the downtrend continues.

So – will it hold, or will it fold?

To answer that question….Take a look at what happened in late 2018. The market peaked in August and began declining from its 2940-ish peak to about where the recent selloff landed. It then rallied to 2800, then fell to a lower low of 2650.  After falling to 2650, it rallied back to 2800 again. Another drop to 2650 and a final rally to 2800 again in November. From there, the final drop to 2350 in December completed the selloff. A rally brought the market right back up to the old highs of 2950-ish. But no materially higher high (only nominally higher) than the prior highs. I believe the lack of a meaningful higher high tells us that the market was determined to stay below 2950 or so for a while. Sure enough – we saw the market pel back over April & May with the trade talks in the background. Depspite n resolution on the talks, the market is back in rally mode. While much of the news tells us this rally is based on interest rate easing hopes – I am one to believe that the market looks for a reason to move from an overbought or oversold level – its not the reason itself that is the cause of the move.

Market

I wonder if the current rally may be a replay of the scenario from 2018 just described. Perhaps it won’t be an exact enactment. Perhaps the market will make it past its old highs of 2950 and break out of the sideways consolidation it’s been in since January 2018. That would be bullish.

Really, there isn’t a clear direction or trend that we can rely on right now. For this reason, we remain 18% cash equivalent (8% cash, 5% single inverse = approx.. 18% cash equiv. portfolio structure). I’ll stay in the inverse for a few more days and see how things play out. I don’t mind being a little under exposed to the market at this juncture.

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7 Comments

  • Hi Keith,

    It looks to me like international markets ZDM.TO is a better bet than S&P500 right now. Unless the move ends tomorrow, ZDM.TO just made a W-bottom? I’d like to read your thoughts on W-bottoms. Is that a pattern with higher-odds?

    Thanks!
    Matt

    Reply
    • Certainly ZDM put in some form of a double bottom back in 2016- and that lead to the rally. Right now it is testing a ceiling that’s been in place since 2017 near $22-$22.50
      As far as double bottoms–I encourage you to read my book sideways. My belief is that all bottoms, which i prefer to call “Phase 1 consolidations” are more or less identified and traded in the same way. That is, no more trending peaks and troughs. Some sort of up/down contained action–with a neckline. When the neckline is broken –its good. All bottom formations have a neckline–the bottom of the patterns differ ie: H&S have a bigger drop in the middle, rounded bottoms have a rounded bottom look, double bottoms have 2 similar lows, and rectangles have multiple similar low. I spend little time trying to identify their named formation. I just look at the “no more highs and lows” sign that its not a trend, and wait for a breakout from whatever pattern that formation takes on. They are all valid–its the neckline and the breakout that matter. Not who the formation plays to the textbooks.

      Reply
      • Thanks Keith,

        Today it clearly moved above that W-bottom, but yes, still under 22.00-22.50.

        Someday, I wish you could blog about how to determine how meaningful is a level resistance. For example, with ZDM, it didn’t spend much time inside 22.00 to 22.50, so one strategy could be buy the day it breaks that early W-bottom, then, wait for a break above 22.50, and buy the second half. Would be interested to know if that is something some technicians do within their funds.

        I do own your book but probably forgot some points. So much information those days it’s a challenge to keep it all in my head.

        Thanks!
        Matt

        Reply
        • Matt–wait ’til you get to be my age–re trying to keep stuff in your head!!!
          Resistance can be a last high, but most of the time I look for periods where the security has struggled to break through a price point multiple times AND/OR an area that used to represent significant support. Again, support being proven by multiple tests at a price point. Old support becomes new resistance and visa versa. Per my book–I explain why –in a nutshell- its because resistance or support are price points that have been hit multiple times. Each time that price point was hit, recall that means that somebody sold, and somebody else bought. They recall their buy or sell price. If they regret the trade–they want to (in the case of a buy – then a break below support) get their money back–thus, old support becomes resistance as the remorseful buyers at that old support point start to sell as soon as price approaches their buy point. They want their money back.

          Reply
          • Hi again Keith!

            A last question regarding ZDM..promise! Think it’s a great case analysis for supply and demand, break-out trading and even swing trading. And, it’s not a single stock which you don’t like commenting on.

            Looking at the *adjusted* ETF weekly chart, yesterday, it closed at 21.80, breaking-out above 21.72, the highest historical price. This *adjusted* chart is what all users of StockCharts see when they punch-in that ticker.

            Now, if more participants have in their minds the actual price, then I should be looking at _ZDM.TO, the *unadjusted* chart. That chart tells another story. I think it’s the price you are looking at, which says that there is quite a bit of supply above, at the 22.00 level.

            So, which chart do you think gives the true story?

            Would really appreciate feedback.

            Thanks!
            Matt

          • Matt–this is a good point. First, do not assume that everybody uses stockcharts.com to look at stocks. They don’t. In fact, most traders, myself included, use Thomson Reuters and or Bloomberg during the day–and stockcharts.com or freestockcharts or any number of services to do their more detailed analysis. True, the less sophisticated trader may use stockcharts with the dividend incorporated. But they are one component of the market–not the entire market.
            In the end, one big influence is that they investors know where they bought-which influence support resistance-they don’t look at their dividend when assessing price.

  • Thanks for your reply Keith.

    I did buy the W-bottom break, and added some today (July 26th) as it looks to me like quite a nice C&H, price having made higher lows long enough to convince me enthousiasm is back.

    As you pointed-out, the FINAL battle is at 22.50!
    If it makes it, considering the long base, odds are it moves 10% plus.

    I’m no value investor, but that index pays a 2.6% dividend and its PE ratio is 14.60. Really wonder why value investors are not buying the world index… or maybe they are, now…. those are the types of metrics value investors go for.

    Have a good weekend

    Reply

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