Lots of questions are coming in regarding how I might play the current market. I’ll start off by quoting a reply (with some minor edits) I gave to a reader named Chris as to how I am strategizing right now. Chris’s question came about after last week’s blog regarding the overbought market condition:
“Any pullback that brings you into the RSI/stochastics mid-range becomes attractive. You never know how far a pullback goes, so there isn’t an absolute rule here. I can only tell you how we do things. If we see support held at the 2018 longer termed support levels around 2540-ish, and a deep oversold oscillator sell with a hook up as markets bounce from about 2540–we might go all in. But if we get to, say, only 2600 and it looks like not much more downside momentum is happening, we will buy with 1/3rd or 1/2 of the cash.
From there, we see what happens. A not-too-deep correction followed by a little hook could still turn down on you–or it could continue higher…so we take a middle of the road approach by legging in. We may buy as it rallies, or wait.
I’m patient. The downside of our approach is missing out and underperforming a bit. I don’t care. I hate losing money more than I hate missing the first part of the move.”
So…where are we now? The chart below is a neartermed view of the S&P 500. The market is overbought on the daily chart via moneyflow momentum (top pane), stochastics and RSI. Longer termed momentum indicator, MACD, looks fine. Cumulative moneyflow is OK too. The chart also shows us that major 2018 support of 2580 (which becomes resistance) has been blown through. The recent overbought signals arrived in time for a test of minor resistance (former support) near 2640. It’s no surprise to see a bit of selloff. I have further reduced our equity position in the ValueTrend Equity Platform – we are now over 30% cash. Having said that, I do not expect to hold the cash for too much longer – assuming a successful test of support in the coming days. More on that thought below.
So far, the market remains intact. It is probable that a pullback to near 2580 – given the oversold hooks we have seen – is in the cards. It is possible that a further test of 2540 might be seen, but that is best left to discuss only if 2580 is taken out. My stop remains at a price drop below 2540 for 3 days. If that occurs, and I am not making any predictions here, my thoughts will be that we are indeed entering into the 3-staged bear market pattern discussed here.
To reiterate my comment to Chris…I’m patient. The downside of our approach is missing out and underperforming a bit. I don’t care. I hate losing money more than I hate missing the first part of the move.
Keith on Bloomberg/BNN TV Thursday January 24th, 2019 at 6:00pm
Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management. (Note: Times and Dates may be subject to change)
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Are you in Orlando in February?
If you are in Florida as a visitor, a snowbird, or as a resident, you might like to attend the MoneyShow. I’ll be speaking at the Orlando MoneyShow on Feb 8th at 3:00pm at the Omni Resort at Championsgate. If you haven’t been to that resort, it’s quite lovely–and parking is free! The link below references my talk: