Special report: An action plan for the current market

 

Before we get started on today’s market comment, don’t forget that I’m on BNN MarketCall Tonight – Next Tuesday September 30, 6:00pm. Phone in with your questions on technical analysis for me during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]

The markets

I noted about a month ago that the market was overdue to experience a very normal, and healthy correction: https://www.valuetrend.ca/?p=3200. I suggested in that blog that the S&P500 will likely land somewhere between the 50 day MA and the trendline noted at that time—which was around 1930-ish. The S&P had been holding near or above 2000 at the time of writing. I have made it clear on this blog and on my BNN appearances that I’ve been holding some 20-25% cash in light of this potential – some of my readers may be doing something similar.

I would have worried if we had NOT experienced a correction over the month of September. As I have mentioned before, it is better for a market to pull back to a trendline and bounce off of it to remain intact for an extended period. It would appear that we are approaching the “buy zone” for the market at this time. I’d like to offer a few suggestions as to increasing your odds for success at buying into this market.

Here’s a chart of the longer termed trend for the S&P 500. You can see that, despite Septembers weakness, the trend is intact. You can see that the market broke the 50 day MA (green line), but is well above the 200 day MA (red line). It’s not taken out the prior low—and is very close to testing the trendline I’ve drawn on the chart.

s&p channel

If we take a closer look at this index, you can see that the market may hit the trendline any day now. Investors will want to see that test, which looks like it may fall around the 1960-70 area – and ensure that it holds. You want to see the market test and stay above the trendline for 3 days at a minimum. Similarly, you want to watch for a break of the trendline. A one-day break will be insignificant. Again, see my “3 bar rule” discussed in my book Sideways to confirm if any break is significant. If the trendline breaks, then give it 3 bars before drawing a conclusion. Note: If the line breaks, your next point to watch is the last low—which lies just above 1900. We REALLY don’t want to see 1900 taken out!

S&P nearterm

Working against the chart right now is the divergence in momentum indicators – note the lower highs and falling trends on stochastics, RSI and MACD. Again–for this reason, I suggest you wait for a 3-day bounce off of the trendline before buying.

My guess is that the current trendline will hold—I will be investing upon a successful test and rally off of it over 3 days (3 bar rule at work!).  The big-picture Accumulation/distribution line is bullish (bottom pane) – and that’s important for longer termed investors.

As for the TSX, this index has taken out a minor low at around 15,100. It’s been a couple of days now, so I’d suggest that if a strong rally doesn’t appear promptly, the next target for the TSX lies around 14,600 – which is where the previous low and the 200 day MA meet – not to mention the old breakout point. Give it a day or so to see if we get a rally -if we don’t, look for 14,600.

TSX LONG

Working against the TSX is the current commodity cycle. My long termed outlook for commodities remains bearish, as it has been since I blogged about a 35 year cycle in 2011. I recently posted a blog where I reiterated the commodity cycle: https://www.valuetrend.ca/?p=3205 – This work suggests that the TSX may return to being a struggling market. I continue to suggest picking TSX stocks carefully, while emphasising US and International stocks in your portfolio. BTW, I’ve also written an article in The MoneyLetter covering the commodity cycle, along with some alternative investment ideas. Its posted on the corporate website at www.valuetrend.ca – hit the button at the bottom of the page for Investors Digest & MoneyLetter articles.

4 Comments

  • Keith,
    I would like your opinion on Brookfield Infrastructure Partners (BIP.UN-T). It has been breaking down lately. My cost is slightly below the price it is at now. Would you continue to hold it? Would you sell it and buy it back later? Thanks.

    Reply
    • I’m watching it as its in danger of taking out its current support of $42. If it holds, I’d buy. If it doesn’t, we may sell.

      Reply
  • This is beginning to hurt!

    I’m a few days late in reading your excellent report so I can see your worst case scenarios are coming true.

    The TSX is just below the 20 day MA and is at the 50% retracement. Next stop: 14,300 at the 62% retracement, on it’s way to the 100% retracement at 13,450.

    Lugubrious indeed. The optimists amongst us can hope for a recovery once October is over.

    Reply
    • Fred–I’m just about to post an update on that report!
      I am patiently starting to buy this week, but holding back on a chunk of cash for another 1-2 weeks to let it play out.
      Smile Fred–this is where the smart investors do best – and I am under the impression that you are one of them!

      Reply

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