How did you feel when you heard the official news of Russia invading the Ukraine yesterday? Did you feel ill? Did you want to panic and sell your portfolio? Or worse – did you panic and sell, paying no attention to the trading rules I am trying to install in your cranial vault? Stock markets opened deep in the red yesterday, but turned around and finished the day positive (SPX, DJIA, TSX all up). In fact, it turned the week (so far) positive. Such a move is called a “key reversal” in Technical Analysis lingo. A key reversal bar can bee viewed as a “hammer” on a candlestick chart. I have blogged many times on the power of a hammer formation to reverse a trend. The weekly chart below shows us what is, so far, the making of a reversal candle. Of note: we need to see the week (today, Friday) finish strong to validate the weekly chart’s hammer / reversal formation!
If you took my Technical Analysis course, you will know that the hammer, along with a couple of other specific candles, are highly predictive in spotting market changes. Yesterdays hammer candle, backed by the neartermed capitulation sentiment as seen on a few key neartermed contrarian indicators, suggest that we may see a base begin on the markets after this years double-digit drawdown on the broad indices. These indicators are shown below. Keep in mind that there are still a few indicators that I use in the Bear-o-meter (which will be reported next week) that are NOT showing extreme pessimism. This leaves room for error in a bullish prognosis. Still, the signals I am seeing are encouraging.
NYSE New highs vs. New Lows
This indicators shows us if market breadth is becoming “too low”. Stock markets move to extremes. Too many stocks are going up when things are overbought. Too many stocks going down when things are getting oversold. The new high/low indicator is deeply oversold right now. This situation never lasts for long – its bullish to see the extreme lows.
Retail investors returned to their bearish outlook this week. That’s good news – note how the SPX tends to bottom when the AAII bear sentiment spends time above the “paranoia” line. This tells me things are approaching a buying setup.
The VIX saw a brief moment of around 35 yesterday before retreating to a closing price of 30. My “buy” trigger is a close above 32.5 (to be a-retentive about it). Because the VIX didn’t close above 32.5, I cannot say an official buy signal was triggered. This line chart illustrates close only prices, which doesn’t show how 35 was seen in the morning. Still, I require a close over 32.5 to validate my system. So, lets say the VIX gave a near-signal. Hmmmmm…
Markets will buy into – or sell off in anticipation of – an event. The good news or bad news gets priced in before the occurrence. Once the event happens, the good or bad news is more often than not priced in. “Buy on rumor, sell on news” is a Wall Street adage. It means that you are too late to buy once a positive event is announced. In fact, the stock or market may have peaked on the day of the news. Take a look at oil. Its gone up – mostly before the bad news of Russia invading Ukraine happened! Oil may have peaked for the time being (although you know my stance on inflation – for a longer termed play). Oil may need to retreat a bit now.
You could reverse the Wall Street adage to say “Sell on rumor, buy on news” if a negative event is anticipated. The negative news gets priced in. Case in point: Stocks sold off as Russia threatened invasion. Beyond oil and commodities, most stocks went down…And now we have the official news. Russia has invaded Ukraine. Sanctions are being imposed. Perhaps now that the news is out, and markets had pre-priced an invasion, stocks are getting to the “Nowhere to go but up” stage!
If you are a student of my trading structure, you will know that I wait 3 days after a break of technical support before acting – whether its a positive or negative break. We have evidence that the market may be setting up for a rally – and a buying opportunity. We have a hammer (key reversal) formation in the making (official at today’s close). We have sentiment capitulation. But the evidence is NOT complete. We need to see a return to 4300 support on the SPX to complete the evidence of a capitulation bottom. If the market does not find support before Tuesday March 2nd, then we do NOT have the conditions to buy into the market. At least according to my rules.
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