The game plan

The following is a reprint from a  client update we just sent. I thought it would be of use to readers of the blog.

As I suggested on BNN recently, the market has made it back into a “vital zone of support”.  My last blog also discussed this vital support zone for the markets. The S&P 500 must maintain 2540 or higher in order to be considered on the mend from last year’s carnage.

The next week or so determines if it fails or rallies further. The S&P 500 needs to hold 2540. We can’t predict if it will hold that line.  On the negative side, there is a traditional market cycle (some call the Elliott Wave pattern) of a 5 wave bull market followed by a 3-staged decline. This 3-stage down pattern comes after a speculative finish to the bull market that may (or may not) have occurred in 2017. I’m not predicting 2017 was the final leg of the bull market. It is just a potential –but it’s a pattern we’ve seen before, and the next week will tell us if that bearish pattern does carry forth. If 2017 was the end of the bull market, then here is how it might happen:

  1. A leg down (which we did see to December 24)  …. called “A”
  2. A rally (which we are getting now) … called “B”
  3. A final big meltdown that could take the S&P as low as 2000 or thereabouts.….called “C”

Below is a chart with a potential view of that 5/3 wave pattern applied to the S&P 500.…which may not be accurate if markets carry on higher. It is a “what if” scenario, not a prediction. Here is a blog to help you understand this market cycle. This is why the coming days are so important—a decline below 2540 will tell us if that 3 wave bearish pattern may be in place.

 

On the positive side, the market has rallied back to the “vital support zone” – which is a step in the right direction. The market may prove to go up strongly after this week. If so, that is good news. But if it fails, it will be biased to continue falling. We are keeping an open mind to both potentials! And we have a plan for both situations.

 

The game plan if the market stays firm

If the S&P 500 maintains above 2540, we will look to selling some stock positions in the Equity Platform and buying some index ETF’s with the cash that we’ve been sitting on. We anticipate that the market will remain choppy, even if it does show better strength going forward. As such, we will be using my Short Termed Timing System to trade the pattern – and index ETF’s are the best way to accomplish this. This can be a very profitable trading strategy in a choppy market. Please review this blog to understand how that system works.

For the Income Platform, we anticipate reducing a few of our positions and redeploying into fixed income, cash, and one or two new better trending dividend equity positions.

 

The game plan if the market turns down

The need to react quickly will be paramount in the event of the S&P not holding 2540. We anticipate selling stocks in both platforms if that level doesn’t hold. We will be turning to Keith’s short termed trading system to play the inevitable swings that occur within a declining market. Again, index ETF’s are ideal for this type of strategy—which will largely rely on technical patterns. We can earn positive returns in this type of market by this type of trading.

 

21 Comments

  • Kieth In the Elliot wave marked above could it be argued that Jan to April 2018 was the A wave, followed by the B to October so now we are trying to come out of the downward C and start the one wave?

    Reply
    • Hey David–I don’t pretend to be any kind of an EWT expert. But from my limited (and hopefully somewhat pragmatic) knowledge…you can get sideways periods that “real” EWT people label as a,b,c,x,a,b,c,x and so on. Perhaps last year was one of those periods. My only suspicion of the “count” that you describe is that October was an all time high for the SPX. From there the market took out the prior support that i have spent so much time talking about (2540)–on to lower lows. So by traditional ways of looking at the 1-5, then a-c counter trend waves, we might want to start counting from the October peak. But as I said, if we don’t get a rebound followed by a failure, that a-c counter trend count is no longer valid–at least from my understanding. Again, I approach EWT from a conceptual point of view, and rely more on traditional technicals (trendlines, support resistance, etc).
      I like to keep things simple and look at EWT as a a temperature gauge for market crowd behavior. Read my book Sideways for more info on that aspect of it. Basically, the psychology of the market somewhat lines up with a typical 5 wave, 3 wave crowd behaviour point of view. But, we shall see….

      Reply
  • Great article Keith, we got up markets today which looks like it is following the move in $WTIC. Oil inventories dropped a little. It would appear markets are trying hard to justify the rally. On another note, is it me or is there sharp incline rising wedges starting on Dec 24 on $INDU, $SPX & $TSX? Another thing to note is that the indexes are approaching their 50 day MA’s, which they haven’t been able to stay above since August.

    Reply
    • WS–I have a hard time defining rising wedges. And I have observed that they are less predictive than other formations–simply because they are so hard to identify, and so much in the eye of the beholder. Bulkowski’s Encyclopedia of Chart Patterns didn’t particularly identify them as super predictive either, if I recall from reading the book a few years ago. I suspect that’s because of their more interpretive nature. Eg–a double bottom or top is pretty easy to spot, as are symmetrical triangles, H&S formations etc.

      Reply
  • Hi Keith,
    Thank you for the chart (Elliot Wave).
    The S&P500 has been over the 2540 level for 4 days now. I know you have a 3 day rule to see if it holds, which it has.
    So, is now the time to jump in an buy quality stocks?

    Reply
    • 2540-2580 is the zone. it broke 2580 today–personally i am giving it a couple of days and let it hold at 2580, it may have a pullback day as markets get a bit overbought and that will be my entry. I’m also looking at rotation out of some stocks and movement into ETF’s for a shorter termed rotation strategy as described in the blog

      Reply
        • Don’t read into this that I am bearish, Sally–I am not
          I have an open mind to all possibilities.

          Reply
          • I was reflecting on the heat of the recent markets.
            Keith you teach us about managing in all markets and your book is called Sideways. You’re no bear.

            Thank you for your diligence.

  • Hi Keith: Ive become a believer in your rules for the last 6 months. The thing I like best about your analysis is that you are not into predicting, but, by going with what the market is telling you. Is it out of line on here to ask what ETFs or better yet what sector ETFs you will be playing in your shorter term strategy. And thanks for keeping it relatively simple for us novice investors

    Reply
    • Thomas I don’t mind telling you the types of ETF’s–I hesitate to specify “brands” as I don’t like to promote anyone – that, and I think you need to look at them individually to ensure they hold the right weightings. Eg–you can buy a number of “emerging markets” ETF’s and many have outright different country mixes, let alone weightings in each country–making them very different animals from each other!
      But…I am looking at larger positions in the TSX 60 type ETF’s and the S&P 500 ETF’s, then smaller positions in broad emerging markets ETF’s. Again–do your homework.
      Keep in mind that its all about the look of the chart and the relative overbought/sold levels of these indices at the time of pulling the trigger.

      Reply
  • Keith,

    Quick question. When I am charting 2-3 year performance of a stock or an index (let’s say s&p 500), do you usually like to do the chart in weekly or daily periods? Does it matter in determining support/resistance level?

    Thx!

    Reply
    • Awert–you might want to grab a copy of my book “Sideways”–it will help you formulate a system and answer such a question
      The short answer is that you need to start from the top down–depending on your time frame of anticipated holding period–ie if you are a long termed investor vs mid termed trader or short termed trader
      I will use myself as an example
      Generally I am a mid termed trader (with a few stocks that are the exception). So I start with the weekly chart in most cases–going back about 6 years or so
      Then I look at the daily picture to refine the support/resistance and look at momentum indicators

      Again–read the book Sideways, it will help.

      Reply
  • Hi Keith,

    On one hand, the SPX did not pullback much today (the 10th) and so it seems that many are expecting a pullback that will not come. One the other hand, at least on the TSX, staples like Metro and Loblaws are doing way too well (relatively). Our largest real-estate investment trusts are also doing quite well and on longer term charts seem poised to break-out. On the other hand, a LOT of money has left equities on the retail side, which is typically bullish. Too many opposing signals. In my opinion, the outperformance of staples and REITs makes me cautious. I don’t think retail investors are buying those. They are buying the exciting assets like HMMJ and probably picking bottoms. I think the smart money is buying MRU, L and EMP/A, which are close to all-time highs.

    I think that the the rug will eventually get pulled from underneath and we get a real shake-out. The recent correction was not painful enough. There were many friends who were asking me if they should buy CM and BNS. I think good bottoms are made when none of my friends are interested to buy. At least, that has been the case since 2007.

    Any thoughts?

    Thanks Keith. May the trend be with you

    Reply
    • Matt – very thoughtful notations. Good points, all. I don’t know that I have any insight on whether people are too bullish, other than following sentimentraders smart/dumb index. Its back to a neutral reading with some movement out of the market by smart investors and some rotation in by retail – but not extreme on either side. I don’t discount that there will be a rug-pull as you describe it–that would be the “c” leg down per the EWT discussion. Timing is hard to guess and if that even happens equally hard to prognosticate on–but I keep an eye open for the potential.
      We did sell another 5% of our equity today bringing us to 18% cash in the equity model. More just from overbought stochastics on the position we sold–kinda looking that markets may be in a temporarily overbought situation now. So long as things say above 2540 it is safe by my standards, and I would buy the indices on a buy signal from my short termed model if that level holds.
      Patience….

      Reply
  • Hello Keith,

    I am looking to purchase 2 ETF’s. One Canadian index fund and 1 US. Just looking to diversify my portfolio a little more as I think we are going to have a lot of volatility this year again. I have never owned an ETF so just looking for some advice on where to start. Just looking to add about 2% of each to my portfolio.

    thanks

    Reply
    • Brad I cannot give you advice on this blog as to specific securities appropriate for you –I can only give individual advice to clients who have completed a full diligence process with us.

      Reply
      • Keith, do you still only take on high-worth clients (6-figure & up)?
        That’s what Craig told me when I called a few years ago.

        Reply
        • Andy–we take household assets (husband/wife, all open and registered accounts incl TFSA’s etc combined) of somewhere near $500k or above. If a person is a bit lower but is doing the max RRSP contribution or something similar – this will grow over the next few years to our minimum, we do take them on. You can always contact us to see if that fits your needs

          Reply

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