Sell the rip, buy the dip?

September 21, 20215 Comments

I hope you watched my Market Alert video from early last week. If you did, you were forewarned about the volatility that we experienced later that week and early this week. Sell the rip, as is said. So, now that a dip has happened…should we buy the dip? What’s next for the markets? I’ve put together some thoughts on those questions below.

To start, I might suggest that if you do not already subscribe to the ValueTrend Update newsletter, you might want to here. Its published periodically, and read by more than 2200 subscribers who enjoy greater insights, including invites to Zoom webinars. Today, we are sending out a macro market analysis in the  newsletter. Hope you are a subscriber, as this one will be informative.

Today, I will take a look at the current moves from a birds eye view of the monthly charts, and then work down to the daily charts. Are there clues to how we should approach the pullback suggested on last weeks video? Was the pullback a one and done, or is there more to come? Hey – that rhymes! Let’s start with a bigger picture look at the market:

 

The chart above illustrates the parabolic move of late. I mentioned in this blog, parabolic moves with little volatility tend to end with a corrective period. But… in order for that overdone angle of ascent to correct itself, the trend must end. The trend is your friend until it ends. And that would mean a lower low and a lower high / break in the trendline. That hasn’t happened yet -even within this contained parabolic trend. The arching trendline (red) to the right of the chart shows us that the correction of late brought the SPX back to, but not below, the trendline.  Further evidence is the slowing ROC (Rate of Change) line at the bottom of the chart. It is NOT in a “V” reversal – which has indicated major bear markets- per my red arrows. This momentum tracker is indicating that the bigger picture is still OK for now, despite any immediate pullbacks. OK, now lets look at the weekly chart:

The weekly chart above has an array of indicators on it that I tend to use regularly. One of my “cautions” is the SPX % distance above the 200 day (40 week) SMA (Simple Moving Average). If the market is over that SMA by 10% or more, the market is overbought. It reached that level in August, and has drifted down since that time. The SPX has not taken out its last low and appears to be on trend on the weekly chart.

However…Of concern in the above chart are the rounding momentum indicators. I get particularly concerned when MACD rounds over. Its early yet, but the signs are there that this may be occurring. Meanwhile, moneyflow trend is good (bottom pane) despite waning moneyflow momentum (top pane). Conclusion: The mid termed view is on trend, but momentum studies are weakening. This may imply danger ahead, but its too early to determine.

I’d like to look at the daily chart of the SPX. But first, lets look at market breadth. I could pull up the NYSE breadth as a broad indicator, but since we are talking about the SPX, I chose to look at the A/D (Advance Decline line) of the SPX. The daily A/D chart for the SPX suggests trouble is brewing. The A/D line has broken its last low and has broken its 50 day SMA (blue line on chart). The 50 day SMA has supported this line for the last 12 months. Last September, it broke and the market (which was in a correction) moved another leg lower to complete a 10% correction. The current correction to yesterdays low is less than half of that. Could we see another 5% downside?

Below is the daily chart. You can see by my green horizontal line that the SPX just took out its last low and also took out its 50 day SMA. Momentum indicators like stochastics and RSI are oversold, indicating a neartermed bounce. But MACD is decidedly bearish, and its a bigger picture indicator. Moneyflow (bottom pane) is weakening and the moneyflow momentum indicator is weak – you will note that it can remain weak for a while as corrections persist. The daily chart shows us that there may be an oversold bounce.

Despite oversold momentum, its not yet confirmed that you should buy the dip unless you are a neartermed trader. As mid termed traders, we need to see a move above the 50 day SMA and a return by MACD to stability. Watch the blue histogram bars on the MACD indicator for a reversal before buying, along with a move above the 50 day SMA.

Conclusion

The expression of late has been “Sell the rip, buy the dip”. I think its too early to say that this dip should be bought. The last two weeks of September can bring seasonally bearish moves. I don’t think there are enough positives in the neartermed charts above to suggest buying yet. But, then again, I have been fooled by greater fools than I in this market. Today begins the Fed meeting. Accommodative verbiage later in the week might push markets back over their buy-signals. Or not. We are still holding our 15% cash, and not buying this dip …. yet. Just in case you were wondering.

5 Comments

  • Just in case YOU were wondering … your communiqués are appreciated … Thanks for the Market Alert Video and the last two blogs. I was watching and wondering when to act, so did take action on your video and better held my capital position. I was also debating the ‘buy the dip’ yesterday but stayed away and held my cash position and so appreciated your two blogs today … in fact I did a little exercise yesterday as to where the S&P might land if continuing down over the next while … not so easy to see that.

    From a Macro perspective, I am wondering about impact two global factors that might be clouding the technical – 1. Optimism that, albeit not perfect, globally we have been able to take positive action against Covid-19 much sooner that was expected in early 2020 which saw forecasts of a vaccine that might take years to achieve, and 2. Despite the continuing dire warnings and declining environmental conditions resulting from Global Warming, there finally seems to be mounting a global effort to now better address this issue.

    I know these are not Technical Analysis issues but perhaps these are have some impacts on the technical issues OR MAYBE NOT

    Bruce

    Reply
    • Bruce–more than the environmental thing–I think the COVID talk will have impact–and ever more importantly than that (although this ties into COVID) is the FED–see my newsletter today–if the fed even talks (let alone acts..) overly hawkish, it will result in a correction of bigger than 10% most likely
      Meanwhile, the charts will direct us as if when support levels etc are taken out if they indeed happen

      Reply
  • Hi Keith,

    Do you think the Ned Davis chart you posted at the beginning of the month is being validated by current market behaviour?

    Reply
    • Possibly…how’s that for a wishy washy answer? I do feel that risks outweigh rewards over the next 2-3 weeks

      Reply

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