The natural question: “Is the bull market over?” After all, investors bloodied by 2000-’03 and 2007-’09 are prone to doing the absolutely wrong thing at the worst possible time.
Who can we blame for their errors? For starters, the financial press plays an undeniable influence on the public’s personal wealth.
Every time pullbacks occur, they trot out doomsayers like Marc Faber of The Doom & Gloom Report (gotta love that name), who is now calling for a 1987-style crash.
Others say the Hindenburg Omen will cause a crash soon. This “omen” is like a broken clock: right twice a day … and wrong too many times to count.
Remember the media WILL ALWAYS grab an “If it bleeds, it leads” story. Those are what attract viewers.
Or so they think.
People who listen to doomsayers too much eventually make bad portfolio decisions. They sell when they should be buying and buy when they should be selling.
Then they get frustrated, go to cash and sit there until markets are at all-time highs again. Then they come back into the market at just the wrong time.
Sound familiar? If this describes you, you’re not alone.
I like to pick on CNBC because I believe they do a great disservice to their viewers with the above approach. Some of my colleagues and I call CNBC “Comedy Central.”
Sure, there are some very bright people on CNBC … but those with little market acumen often outweigh the true experts.
For example, Scott Wapner, aka “The Judge” (gotta have a cool nickname), trotted out famous technical analyst Ralph Acampora in early July.
Acampora said, “…we made a low on June 24 and it is going to carry into September.”
Ralph Acampora made this very definitive statement on July 9. If you followed his lead, you got really long at 1,652.32. You can click on the image below to watch the video:
Then on Friday, Aug. 16, in an interview with Maria Bartiromo, Acampora noted that now, “I came up with a new number on the Dow Jones Industrial Average of 13,333.33.”
What is going on here? First, he was bullish; now he is bearish at the same level!
Ultimately, Acampora called for a 15% sell-off in the next two months, followed by a tremendous year-end rally. You can click on the image below to watch this video.
This shifting analysis is enough to make your head spin. If you listen to multiple pundits, you may be ready for Prozac.
So maybe now is a good time to turn off CNBC for the rest of the year and see if you can make more money!
Tune Out the Talking Heads … and Tune in to 3 Key Price Indicators
I laid out the above for a specific reason. I wanted to show that opinions are just that: opinions.
When predicting market moves, I prefer to let the numbers dictate my opinions and not make predictions based on opinions or a crystal ball.
I follow the bouncing ball based on the numbers and adjust accordingly.
What numbers should you watch? My strategy to pick successful, winning trades includes three time periods: intraday, daily and weekly/monthly.
Looking at the day-to-day trading activity is useless unless you can discern patterns. I do this using the Erlanger Value Lines. These lines track overhead resistance, pivot points and underlying support.
Resistance and support tell me when it is time to buy or sell. Pivot points are predictive indicators. They give me an idea where future resistance and support will lie.
Quite simply, I track how the market finishes each day. If it’s above resistance, is the market had a strong day. If the close is below support, I call it a weak day.
Here is what I’ve seen since January 2012:
- 29% of the time, the Dow Jones Industrial Average, S&P 500 and Russell 2000 closed above resistance.
- 28% of the time we are closing between resistance and pivot.
In other words, the stock market benchmarks looked good 57% of the time, and 43% of the time the day is finishing rather weak.
|Closing Rank Summary|
|Above Resistance||Resist/ Pivot||Pivot/ Support||Below Support||Average Rank|
This shows me how the month is shaping up. August has been a struggle, as 60% of the time we traded below support against a historical average of 42%.
|Intraday Movement Summary|
|Above Resistance||Resist/ Pivot||Pivot/ Support||Below Support|
Now that we know we are in a pullback, we need to ask the million-dollar question: How have other pullbacks looked?
Using Past Pullbacks as Prologue
The market started moving up in November 2012. This is the fifth pullback since then, but only one of those can be classified as a correction (the May peak to the June low). Now the June low to the August peak is approaching correction status.
By the way, I define “pullbacks” as 2%-5% losses. A “correction” is 5%-10%, and a “serious correction” takes you down 10%-15%. Losses beyond 15% are where bear markets begin.
With these guidelines in mind, I looked at retracements since the November low. Conclusion: The typical pullback retests the 38.2% and 50% pullbacks.
So, what we are experiencing now is nothing outside the norm.
The chart reads: “Very interesting. We corrected below the 38.2% by exactly 1 cent. Coincidence? No way the machines knew, and they bought.”
The chart is from last Friday’s close and now we are a bit lower at 1,642.80 as of Wednesday’s close.
When a pullback occurs, I use my oversold indicator to tell me when markets are at an extreme.
Guess what? We are there right now!
We are currently in one of the most-extreme readings since January 2012. I’ll start nibbling when the score moves back above 30.
How to Follow the Next Market Trend
The expression “It’s always darkest before the dawn” definitely applies to the stock market. With these very basic tools — support, pivots and resistance — along with my oversold indicator, I find it very easy to sleep at night.
Now that we understand what is going on, how can you follow trends?
I don’t just look at daily action. I also review weekly charts, especially those tracking the 50-day moving average and the slope of the 50-day moving average.
The media will tell you to sell when the 50-day moving average is broken and buy when it is above that level. But remember, we started this exercise by tuning out the talking heads. A much better approach is to follow the slope of the 50-day moving average.
That’s because using the slope of the 50-day moving average can prevent you from selling when the 50-day moving average gives you a false signal. The chart below depicts those false signals.
What’s the bottom line? The current pullback is typical of other pullbacks since a nice uptrend began last November.
This pullback is not over. Right now I am waiting for signs that it will become a full-blown correction, or that it will not.
When my three-and-a-half-year-old son gets upset, I often tell him to breathe slowly. I do the same thing myself as an investor. The trick is to breathe slowly and not make decisions until I understand the numbers.
Next week, I will show you a simple model I developed to track some measures I affectionately call “The Market Crash Indicators.”
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