Monday madness: Is today’s selloff a reason to panic?

I try to be as rule based as I can within a stock trading environment. Readers who have followed this blog consistently will know that we at ValueTrend held 22% cash over the summer based on some of those rules (Bear-o-meter readings, seasonality). We’ve also been following some buy-in rules in an attempt to sensibly try to take advantage of the October selloff. For example, in mid-October as markets declined, I noted that the market could continue to fall.  Before buying, we wanted a cluster, or consolidation, of up/down action on the market to help confirm the beginning of a market bottom.  Here’s the blog on that suggestion.

After we got a bit of sideways action, I then noted on this blog the next positive development – a positive move on the Bear-o-meter.

I noted that before stepping in, I wanted to see a few positive days (I tend to look for about three “up” days—see my book Sideways  to confirm a potential discontinuation of the waterfall decline.

I also wanted to see the market move over the 200 day SMA and stay there for (you guessed it…) a minimum of 3 days before entirely committing my cash.

Here is the summary of how I  viewed the recent market correction as outlined in my blogs, and what I wanted to see to buy back in:

 

  • Consolidation pattern for evidence that the meltdown is slowing/completed
  • Positive Bear-o-meter reading
  • Seasonal period positive
  • A series of 3 positive days within a week (or less)
  • A move above the 200 day SMA lasting 3 + days

 

I also offered some more musings on my buy-in strategy on this blog.

After the positive 3 days signal noted during the week of October 29th, I made the decision to step in with a little less than half of our cash (10%) on November 5th – the day before the-mid termed election date. On Wednesday Nov. 7th, we got the next signal – a move over the 200 day SMA – which stood at 2762 at that point. The count began the next day – which was last Thursday. Today (Monday Nov. 12th) is the third day of that count.  As I write, the 200 day is being contested by a break. If it doesn’t hold, I will wait it out until I get my 3 days in a row over the SMA. I can sit on my remaining 12% cash for as long as it takes to see 3 days over that moving average.

 

What happens if this selloff continues?

Should the market break down, and take out its February low – which was in the low 2500’s – I will consider that a new sell signal, and a potential for a bear market.  I will raise more cash if/as/when that happens (after 3 days, of course…). Favorable seasonal tendencies and a neutral Bear-o-meter reading suggest that to be a low probability occurrence.  However, never say never.

 

 

Conclusion

 So, I stay where I am for now, invest the cash if we see three days over the SMA. We sell if the market goes below 2500. But that’s a long way off.

That’s my way of doing things. BTW—on a prior blog, I noted that trend lines can be punctured for a while – so the break of the trend channel shown on today’s chart, while disconcerting, is not an unusual occurrence. the chart above shows that longer momentum studies such as MACD and RSI are still moving up, but stochastics (a neartermed momentum indicator) is peaking. This suggests that today’s pullback is likely temporary. We shall see.

 This blog is all about discipline. We are dealing with probabilities, not absolutes. To deal with those probabilities, you will  have your own way of doing things, and far from it for me to tell you what to do. Today’s blog is just an outline of my own discipline. Perhaps it will offer some insight into how you might form your own approach to this, and other market movements.

Please feel free to post your comments and questions below. I might note that I’m always looking for suggested topics—which should be on points of interest to other readers of the blog. Sectors, commodities or international market indices are good examples. I look forward to reading your input.

18 Comments

  • Thanks for a very timely and helpful review of the current dynamics of the market!

    Reply
  • Thanks for all your analysis it has been quite helpful this year.

    If we look at a 6 month of the S&P and at the two tops of Oct 16/17th and Nov 7th – would you view this as a double top reversal thus a continuation of the downward movement that began around Oct 3rd, or just a sideways movement?

    Bruce

    Reply
    • Hi Bruce
      You may know through reading this blog or my books that I don’t get really tied up in the “Name That Formation” game. However, if we want to look at what may (or may not) be happening right now–there is a potential for the two points you point out (which only appear on a daily chart, BTW) as a “Head & Shoulders Bottom”–but you need a neckline break on the S&P 500 through about 2820 to confirm such a formation. Before that point, it is merely a potential.

      Reply
  • Looks to me like the SPX is carving out an inverse head and shoulders on
    The daily. I think it will go back to close that little gap from Oct 30 then move higher

    Reply
  • Interesting, I’m not really heavy into naming either but thought it looked interesting but did not think about the “Head & Shoulders Bottom”, it will be interesting to see how it plays out …

    Bruce

    Reply
  • Oops I didn’t even read the existing comments before I posted mine. My bad there

    Reply
  • Good article Keith, and thanks for posting it so quickly.
    My question is about consecutive days.
    Leading up to the buy it was 3 green days within a week, but not necessarily consecutive, and breaching the 200 day etc.
    A full investment requires the stock/index to hold the 200 sma for 3 consecutive days.
    Right?

    Reply
    • Yes, I am looking for 3 consecutive days over the 200 day Simple Moving Average (SMA)

      Reply
  • Re Bruce’s comment, here’s my take on SPX (daily chart):

    Price failed to take out Oct 17 swing high. Price is now approaching the mid of last swing and could test 2710-2700 (century figure). A break of 2700 could lead to a retest of October lows.

    Nasdaq Composite is at the mid of prior swing and a push lower could be the retest of October lows. Tech had been the one sector hanging in there, but has significantly weakened. FB looks like it could break Oct. low, AAPL needs to hold the 200 day or a test of July low could be in the cards, NFLX and GOOG look like a retest of Oct lows is possible.

    I’m not seeing panic selling (which could lead to an extreme), so I’m inclined to think that the selling may not be over. However, all it takes is a positive catalyst (China, US Fed) to get the algos to initiate buying.

    Dale

    Reply
    • Apparently some discussion on trade talk progress with China came out this morning….

      Reply
  • Selling in AAPL initiated this move down in market today, permeated into NFLX, GOOG, and even MSFT with best chart of the bunch (FANG) is being sold.

    Selling extending into IBB. Healthcare, XLV, finally weakening. US market overall looks weak.

    We may just get a retest of Oct lows.

    2 things may change sentiment: China trade, US Fed. On that note, the White House has cried wolf way to many times re China, maybe now the market is not falling for it anymore. Kudlow’s appearance on CNBC yesterday is not enough anymore.

    Reply
  • High Yield Bonds (HYG) are being sold. Can this indicate an increased risk in credit markets and credit lending?

    Reply
    • Dale–there are two ways of interpreting the move from HY bonds. One: as you say, possible credit spreads widening. or two: a “risk-off” trade–that is, perhaps HY bonds are not any higher risk than before, but now the investment climate has moved from higher risk sectors like technology and HY bonds and into staples, utilities, etc.

      Reply
    • Sally–2011 was a 22% correction, and sure, something like that is quite possible. Or it could be less downside but more drawn out like 2015-16. Or, it could be a head and shoulders bottom as noted on a comment I made to Bruce. The selloff today/yesterday continues to form what could be a right shoulder within that formation….we shall see….

      Reply
    • If the S&P can blow through 2820, that would complete the H&S daily chart bottom you and I noted. Meanwhile, yesterday looked like an engulfing candle on the daily chart–that can be a directional change candlestick (up, theoretically). We shall see.

      Reply

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